Tag: Trade Sizes

Categories
Forex Risk Management

Tips for Traders Wanting to Take on Larger Positions

Thinking of increasing your position sizes to bring in more profits? It’s true that this can help put more money in your pocket but increasing your position sizes also entails risking more money to make more money. Some traders rush to take larger positions too quickly and wind up blowing their accounts because they just […]

Thinking of increasing your position sizes to bring in more profits? It’s true that this can help put more money in your pocket but increasing your position sizes also entails risking more money to make more money. Some traders rush to take larger positions too quickly and wind up blowing their accounts because they just […]

Thinking of increasing your position sizes to bring in more profits? It’s true that this can help put more money in your pocket but increasing your position sizes also entails risking more money to make more money. Some traders rush to take larger positions too quickly and wind up blowing their accounts because they just aren’t ready, and they have issues along the way because they exceed their risk tolerance when doing so. If you want to pull off position size increases successfully, take a look at our tips below to get the best start. 

Tip #1: Check out your Performance so Far 

Is your desire to trade larger justified by your performance thus far? The truth is that you shouldn’t even think of trading larger positions if your account is in the red. If you jump to larger sizes when you aren’t doing well trading smaller ones, can you really expect to make a profit? If this is the case, don’t be discouraged, as you simply need to keep focusing on improving your results or practice on a demo before you start risking more money. On the other hand, if your account is in the green and has been for a while, this is a good sign that you’re ready to move on. 

Tip #2: Try a Gradual Approach

If you’ve determined that your profits prove you’re ready to take on larger position sizes, you don’t want to make the mistake of making a much larger increase all at once. Trading larger means taking more risks and might come with some downsides you didn’t expect. For example, you might start feeling anxious or fearful now that more money is on the line. Or you might find yourself feeling depressed if you take a large loss that you aren’t accustomed to. The best way to do this is to gradually increase your position sizes over time. As long as you’re getting good results and still feeling confident, you’ll know that it’s time to increase the size you’re taking a little more. 

Tip #3: Look at Percentages vs Dollar Amounts

If you lose money, it can be a lot harder to accept if you’re thinking of the exact amount of money you lost in terms of cash. Allow us to explain: if you risk 2% on a trade on an account that holds $10,000, then you would lose $200. If you risked the same 2% on an account holding $100,000, you could wind up losing $2,000 instead. Losing the $2,000 is obviously much more devastating, and this is why you should think of your losses in terms of percentages instead. It’s a lot easier to think of your loss in terms of over 2% over the raw dollar amount, so you’ll be less likely to become emotional over it. 

The Bottom Line

Before you even think of taking larger position sizes, you’ll need to make sure that you’re account is making money, rather than losing it. Once you’ve confirmed that you’re ready, it’s best to take a gradual approach to trading larger so that you can ensure you keep a secure profit coming in with no nasty surprises. If you ever start to feel overwhelmed, you might want to stay at the size you’re at or go back to taking smaller trades until you’re feeling more comfortable with the increased risk tolerance. Our final pro tip is to think of your risk in terms of percentages rather than dollar amounts so that you’ll be able to cope with larger losses without feeling overwhelmed. Remember that losses are inevitable, so you’ll need to ensure that you’re ready for the increased risk that comes with taking larger trades.

Categories
Forex Basics

Pips and Lots: What They Are & How They Differ

In this article, we have to do some basic math. It is very likely that you have heard the terms “lot” and “pips” and if you’ve read about the Forex market. Below we will show you what they are and how they are calculated. Take the time to digest this information, as it is vital […]

In this article, we have to do some basic math. It is very likely that you have heard the terms “lot” and “pips” and if you’ve read about the Forex market. Below we will show you what they are and how they are calculated. Take the time to digest this information, as it is vital […]

In this article, we have to do some basic math. It is very likely that you have heard the terms “lot” and “pips” and if you’ve read about the Forex market. Below we will show you what they are and how they are calculated.

Take the time to digest this information, as it is vital knowledge that every Forex investor must learn and handle. Don’t even think about starting trading in Forex without being able to calculate the value of a pip and without being able to calculate gains and losses.

What is a Pip?

A pip is the smallest possible change in the value of a currency pair. If for example the EUR/USD pair moves from 1.3150 to 1.3151, that is 1 PIP. A pip is the last decimal place in the quotation. Through the pips, you will calculate the gains and losses. As each currency kept a value, is appropriate to calculate the value of a pip for each particular currency.

In pairs where the US dollar (USD) is the base currency, the calculation would be as follows:

Imagine the USD/JPY pair at a value of 119.80 (you will see that for this pair only two decimals are used, while the vast majority use four decimals).

For USD/JPY, 1 pip equals .01

By this, we mean:

USD/JPY:

119.80

.01 divided by quotation = value of a pip.

.01 / 119.80 = 0.0000834

May appear to be too small a number, but then we’ll see how everything is relative to the size of the lot.

USD/CHF:

1,5250

.0001 divided by quotation = value of pip.

.0001 / 1.5250 = 0.0000655

USD/CAD:

1,4890

.0001 divided by quotation = value of pip.

.0001 / 1.4890 = 0.00006715

In the case where the dollar (USD) is not the base currency, and we want to get the dollar value of a pip, an additional step will be required.

EUR/USD:

2200

.0001 divided by quotation = value of a pip.

Thus

.0001 / 1.2200 = EUR 0.00008176

But we want to know the value of the dollar, so do one more calculation…

EUR x Quote

Thus

0.00008196 x 1.2200 = 0.00009999

We’ll round it up to 0,0001.

GBP/USD

1.7975

.0001 divided by quotation = value of pip.

Thus

.0001 / 1.7965 = GBP 0.0000556

But we want to know the value of the dollar, so we do one more calculation…

GBP x Quote.

Thus

.0000556 x 1.7975 = 0.0000998

We rounded it up to 0,0001.

In the next section, we will find out how these numbers that might seem insignificant can have a big impact when investing in Forex.

What is One Batch?

In Forex it is operated in batches. The standard size of a batch is $100,000. There are also mini-batches that are $10,000. And there are even micro-lots of $1,000. As you’ve already learned, currencies are measured in pips, which are the minimum possible increase. To get any benefit out of these small increases, we need to trade large amounts of a particular currency in order to achieve any significant gain or loss.

Let’s assume we’re going to use a standard batch of $100,000. We’ll do some calculations to see how the value of a pip is affected.

USD/JPY at a rate of 119.90

(.01 / 119.80) x $100,000 = $8.343 per pip

USD/CHF at a rate of 1.4556

(.0001 / 1.4556) x $100,000 = $6.87 per pip

In the case where the dollar is first, the formula changes a little.

EUR/USD at a rate of 1.1920

(.0001 / 1.1920) x EUR 100K = EUR 8,38 x 1.1920 = $9.99735 and rounded to $10 per 1 pip.

GBP/USD at a rate of 1.8045

(.0001 / 1.8045) x GBP 100K

 = 5.54 x 1.8045 = 9.99416 and rounded to $10 per 1 pip.

Depending on the online broker we work with, they may have some different particularities when calculating the value of a pip relative to the size of a lot. But in any case, as long as market prices vary, so can the value of a pip vary according to the currency being used.

How Do I Calculate Profits and Losses?

We already know how to calculate the value of a pip, then let’s see how we can calculate our profits or losses.

Let’s take an example where we buy US dollars (USD) and sell Swiss Francs (CHF). Let’s imagine that the quote is at 1.4525/1.4530. As we are buying USD, we use the price of the ask, which is 1.4530. We bought 1 lot of $100,000 to 1,4530. A few hours later, the price went up to 1.4550 and it was decided to close the deal.

The new rate is 1,4545 /1,4550. Since we are closing the transaction and initially made a purchase to start the operation, we need to close the same transaction with a sale, with a price of 1.4545. The difference between 1.4520 and 1.4540 is .0020 or 20 pips.

Using our formula above, we calculated a gain of (.0001/1.4550) x $100,000 = $6.86 per pip x 20 pips = $137.40.

Remember that when you open a position, you are subject to the spread which is the difference between the bid/ask and is the commission that the brokers receive for executing the transaction. When buying, the ask price will be used, and when selling the bid price will be used.

What is Leverage?

We’ve already talked a little bit about leverage in the previous article (How do you make money in Forex?) but if you haven’t seen it yet, you’re probably wondering how a small investor like yourself could handle such large sums of money. Think of your Forex broker as a bank that lends you $100,000 to buy currencies but only asks for a $1000 deposit as a good-faith guarantee or guarantee to perform the transaction. This sounds too nice to be true, but that’s how leverage is used in the Forex currency market or in some other investment instruments.

The level of maximum leverage available to use depends on the broker you work with and can several from one investment instrument to another. Online brokers offering services to retail customers generally require a very small minimum initial deposit to open a trading account. Once you have deposited that money, you can trade on Forex. The broker will also tell you what margin you need to have available in your account as a guarantee to perform operations

For example, imagine that your broker offers you a leverage of 1:100. For every $1000 you have available in your account, you can open operations for 1 batch of $100,000. So if you have $5,000, you could manage a position of $500,000 (5 lots).

The margin for each lot (margin) may vary considerably from one broker to another. In the above example, the broker requires a margin of 1%. This means that for every $100,000 invested, the broker occupies a $1000 deposit as collateral.

What is a Margin Call?

In addition to the guarantee margin required to open a position, there is also a maintenance margin to keep your position open. In the event that the money in your trading account falls below the required margin requirements, the broker will close some of the positions you have open to put your balance sheet and account back within the required margin. This is a measure to prevent you from having a negative balance sheet and incurring debt. These measures to avoid negative balances are executed automatically according to the evolution of your positions, even in a highly volatile and fast environment like that of the Forex market.

Example #1

Suppose you open an account with $2000 and buy a lot of EUR/USD with a margin requirement of $1000. The margin you can use is the capital available to start new positions or manage losses. As started with $2000, the usable margin is $2000. But when you open a lot, which requires a $1000 margin, the margin available will now be $1000.

If your position goes into losses and those $1000 that remain free in your trading account do not cover the maintenance margin requirements the margin call or margin call will occur.

Example #2

Suppose you open a $10,000 Forex account. You trade 1 batch of EUR/USD, with a $1000 margin requirement. Remember that the available margin can be used to open new positions or to sustain the eventual losses of current open positions. Before opening the position, you would have a $10,000 margin available. Once you open the position, you have a $9000 usable margin.

Make sure you understand the difference between usable margin and the margin used. If your account balance falls below the usable margin due to losses, you will need to deposit more money or the broker will proceed to close the position to limit the risk to both you and them. As a result of this, you can never lose more than the amount you have deposited. It is vital to know the requirements regarding the online broker margin you will use and also feel comfortable with the risk you are taking in each transaction.

Categories
Beginners Forex Education Forex Money Management

Reasons Why Your Trade Sizes Matter

When it comes to risk management, there are a number of different aspects that make it up, one of those things is the size of our trade. This may seem obvious to some, but you would probably be surprised to see just how many people do not fully understand the importance of having the right […]

When it comes to risk management, there are a number of different aspects that make it up, one of those things is the size of our trade. This may seem obvious to some, but you would probably be surprised to see just how many people do not fully understand the importance of having the right […]

When it comes to risk management, there are a number of different aspects that make it up, one of those things is the size of our trade. This may seem obvious to some, but you would probably be surprised to see just how many people do not fully understand the importance of having the right trade size. Mistakes can be made by going too small, but those mistakes won’t cost you your account, the ones that will are those that place trades that are far too big for either their account or the strategy that they are using, this can have a detrimental and potentially dangerous effect on an account.

It should be noted that having a consistent trade size does not actually mean that it needs to be the same for every single trade, there are scenarios where you need to adjust your trade size, especially if that is part of your strategy. What is important is that you understand where your strategy is and what the size that is required for your strategy to be successful and consistent.

So let’s take a very basic look at how the trade sizes can affect your strategy and account. If your strategy has you risking 2% of your account for each trade, this percentage will be a combination of both the trade size and the stop loss location. If the stop loss location remains the same, but you increase the trade size, you will then be increasing the risk for that trade and ti will be more than 2%, as your strategy has a fixed stop loss, then increasing your trade size can be seen as a way to increase your profits, but if your account does not have the balance for it, this is not an appropriate way of increasing your profits.

Many people coming into trading wish to make a lot of money, quit their job, or to just become rich, they do this by placing trades that are far too large for their accounts. Every single time a trade is put on that is too high, the account is at risk, you are on track to lose a lot of money and multiple of these larger trades in a row can result in an entire account being blown, not something that any trader wants.

Similarly, simply not knowing what our trade size should be can cause two different scenarios that are detrimental to your overall trading and profitability. If you do not know that your trades are too high then you will be risking too much of your account which could then lead to a blown account or a lot of losses. If you are opening too small then there is a chance that it will demotivate you. You are not making as much money as you anticipated and were expecting, both are detrimental to your trading, which is why it is important to fully understand exactly what your trade sizes should be.

So how do we ensure that we have the right trade size for our strategy? Well it’s simple, when we set up our strategy, we should have set our risk management and this will include exactly how big a trade should be for any situation that may arise. You should be looking at your strategy and your risk ratio and this will help you to decide exactly what your trade sizes are.

If you feel that there is something wrong with the trade sizes that you are using, you first need to acknowledge that there is something wrong, you then need to be able to work out why it is going wrong. For many it could simply be an emotional thing, others being overconfident or greedy can result in you increasing your trade sizes, this is then putting your account at risk. If You feel like you have too much confidence, or just simply want more, you need to think back to your strategy and to stick with it, it is there for a reason and it is there to keep your account safe, do not overtrade just because you think you can or that you simply just want more, it will only lead to bad trades and losses.

It is important that you know your personal limits, as well as the limits of your strategy, do not try to push them, they are called limits for a reason, they are there for a reason, do not try to push past them., If you are feeling yourself getting the urges to push too much, then take a step back. Your strategies rules are there for a reason, keep to them, it is that simple, the more you try to push them, the more risk that you are putting on that strategy which could potentially push them past those limits which will only lead to disaster.

You need to keep your trade sizes small enough so that when you win or lose, they do not push your emotions too far either way. Your strategy has losses built into it, so accept them and move on, do not let them evoke strong emotions that could potentially jeopardize your overall trading and profitability.

So those are some of the reasons why it is so important to know your trade sizes and to be able to risk only what you need to risk, doing anything differently will only lead to disaster or disappointment.