When you analyze charts, you look at technical levels. You think about how many pips you can get in a trade. You can also see your open position’s profit or loss shown in your account currency.
"What is the logic behind those numbers? How can I manage and control my profit?"
What will be your profit?
Imagine you had a great day and earned 1000 points. How much is it in dollars? That depends.
Think of it as the preparation of a meal. The bigger quantity of an ingredient you add, the more portions you will have. The dollars are your ingredients, input, or, if we choose to say, investment. The more you put at stake in a particular trade, the more you will get for profit. At the same time, your risks also increase: what if you choose the wrong temperature and ruin your dish? In this case, the fewer ingredients you spend to cook, the more you will have left.
"I see now. It’s like a proportion!"
Yes. You can manage your input in a trade. To do that, choose your trade size in lots. The more lots you trade, the more will each point of profit bring/cost in $.
Let’s see that in the example of EURUSD.
If you open a 0.01 lot trade and your account is funded in USD, 1 point of profit will account for 1 cent.
If your account is funded in USD and you open a 1-lot trade, 1 point of profit will be $1 for you.
So, let’s get back to our 1000 points.
In the first case (trade volume = 0.01 lot), you will earn 1000*$0.01 = $10.
In the second case (trade volume = 1 lot), you will earn 1000*$1 = $1000.
Wow! That’s the difference!
"I have to think about this. New horizons are opening!"
Naturally, you will want a bigger gain. However, everything has to be balanced. What if you lose 1000 points? In this case, your loss will be either $10 or $1000. That got you thinking, right? Was it like a bucket of cold water?
Don’t worry; we will soon explain how to minimize potential losses and maximize profits at the same time.
How to choose trade size?
The most important thing is to manage your money. Doing so lets you control the risks and ensure that the amount you invest in trading will benefit you most.
Don’t put all your eggs in one basket!
"Eggs, basket – what? You’re losing me! I just want to trade now!"
That’s a saying, but it has a lot of wisdom. We’ll explain what it means.
You opened an account and put some money in it. The first thing you want is, of course, to spend it on trading, right?
Not so fast!
Billions of traders have already gathered some experience and developed a golden rule of trade volume.
A golden rule of trade volume: the optimal size of a single trade is 1-5% of your deposit.
In other words, if you want to spend $10 on a trade, you should have at least $200 on your account (in this case, $10 will be 5% of your account).
Let’s clarify: Obviously, not all traders respect the golden rule, but the disciplined, patient, and cautious ones follow it accurately. Reckless traders don’t count money. Can you guess which traders keep and multiply their funds and which have their accounts blown out? Not all traders succeed, which is one of the main reasons it happens. Your goal is to be among those who trade with profit. Now you know what to do!
"OK, I’m not a mathematician, but this I can grasp: I multiply my account value by 0.05 and get my trade size in $."
Why do traders use the golden rule of trade volume?
The reason is simple. Imagine you used your entire account to open a trade. Something happened at the market, and the trade went wrong. You are in complete shock and don’t have enough money to make another trade. Bad luck? Not exactly. It’s bad decision-making more than anything else!
Now let’s consider another situation. When you risk 5% of your account, for example, $10 out of $200, you have enough money to open 20 trades. This means that if a trade goes badly, you will have many opportunities left to try other trade ideas.
Even if only half of these trades are successful, with the proper risk management, you can end up with an amount bigger than the initial $200. This means that you had a profit!
"What if 5% of my account is too small a sum to open a trade? My account is not big for now!"
The smallest trade volume you can choose is 0.01 lot. In monetary terms, that’s 1000 units of a base currency, usually 1000 USD or 1000 EUR. That’s not a small amount for a single trade. And if that’s only 1% or 5% of an account…
The benefits of leverage
We have already explained that leverage allows you to borrow money from the broker in order to open trades of bigger sizes. It means that even to open a trade of the smallest volume (0.01 or $1000), you can use $10 or even $1 (with 1:100 leverage, you’ll need $100, and with 1:1000 leverage, you’ll need $1).
You can usually choose leverage in the settings of your account in your Personal Area. Leverage determines what boost you can get from a broker. The bigger the leverage, the bigger the boost. In other words, the bigger the leverage, the smaller amount you will need to open a trade of the same size.
Which leverage to use?
At first sight, the decision is obvious: choose the biggest leverage possible and invest only a little of your own in trading.
Again: not so fast! Always be aware that your risks also increase with leverage. If you open a buy trade, but the price is going down, each point the price moves against you will bring you a bigger loss the bigger the leverage you are using. As a result, you should be careful and choose a reasonable leverage size.
For beginners, 1:100 leverage is usually considered a good choice: it’s neither too big nor too small.
"I see now! I’ll start with 1:100 leverage, then!"
Choosing order volume
We have come to the most interesting part! No doubt that you are eager to open many orders in your trading platform, and you want to know what exactly to set in the “Volume” field.
"Definitely! I understood about 1-5% of an account and got the info about leverage. But I’m not sure what to do exactly!"
The idea is that you put several things together: the amount of money you set aside as the margin for the trade (in this case, you use the golden rule of 1-5% of the account) and leverage (it will transform your margin into the actual and bigger trade size). This will allow you to see how many lots you can trade.
If you have $20 as the optimal size for a trade and use 1:1000 as leverage, you will dispose of $20,000 for a trade. That’s 0.2 lots. Therefore, you can enter this in the “Volume” field.
Some traders prefer using the same trade volume in lots for every trade. This is a very simple concept: once you have found a volume you are comfortable with, you just stick to it. This strategy is easy to implement for beginners because, after the initial calculation, you can stop thinking about the volume and just choose the same one every time. It should ensure the stable growth of your account.
It’s recommended to choose small trade sizes at first. Later, when you gain experience, and your account gets bigger, you may choose to increase your trade volume.
Example
You have $500 in your account. With the leverage of 1:1000, this amount will be enough to make 500 trades of 0.01 lot each, 50 trades of 0.1 lot each, or 5 trades of 1 lot each. Another option is 25 trades of 0.2 lots each. Moreover, there are more options! If you manage your risks, your account will say “Thank you!”
"Wow! It’s simple. I like all these choices I have!"
If you follow the logic outlined above, you’ll be using the following formula:
Lots to trade = Equity * Risk % * Leverage / Contract Size
With a $500 account and 5% risk, that will be:
$500 * 0.05 * 1000 / 100,000 = 0.25
Equity means the value of an account if all positions were closed (i.e., it counts the profit/loss in your running trades).
It’s also possible to take into account the situation at the price chart and the size of a Stop Loss you need for your trade. Here’s how we adjust the formula:
Lots to trade = Equity * Risk % / (Stop Loss in Points * Point Value)
In this case, you know what SL you would like to have and how much you want each pip of the price action to bring you.
Example
You saw that the price has failed to get below 139.030 and turned down. You opened a BUY trade at 139.100 with a Stop Loss at the previous low of 139.030 (SL =70 points). Your Take Profit is at 139.610.
If you need a Stop Loss of 70 points, you will trade 0.5 lots. Your point value will be $0.36. Check the Forex Calculator to get the exact numbers for each trade.
How much money you need to start trading
"I understand now how to choose trade volume. The thing I’m not sure how much to deposit in my account for trading."
The amount of money you need to start trading depends on your chosen account type.
Remember the thing we’ve already learned:
Your deposit determines your trade size...
...so the trade size you want to have determines your deposit!
If you buy 0.01 lots of EURUSD and your leverage is 1:100, you will need $10 as a margin for the trade. If you deposited $10 on the account, your deposit would cover this margin, and you will be able to open another four trades of this size. Each point of price movement will either bring you or cost you $0.1.
Let’s consider some good options for a beginner trader. The examples we bring here are safe and sound from the point of risk management.
Deposit = $100
The amount of risk for a single trade should be below 5%, no matter how big your deposit is. Let’s go with a 3% risk ($3 or $3000 with 1:1000 leverage). If you trade 0.01 lots, each point of price movement will equal $0.01. By dividing $3 by $0.01, we get 300 points. This is a Stop Loss you can afford to have. This is more than enough for a trade you keep open for several hours. It’s recommended that your Take Profit exceeds your Stop Loss about 3 times. Therefore, you will target 900 points ($9) as a profit in this trade.
"By risking $3 in a trade, I will have a chance to earn $9! And if this trade goes badly, I’ll still have $97 in my account. Nice!"
True. This ratio of $3/$9 is called a risk/reward ratio. This way, one good trade ($9) will allow you to have three bad trades and lose nothing. Market analysis, which we’ll study in the next lesson, will help you reduce the number of bad trades and thus be in gain after a series of trades. This is the argument favoring carefully setting trade volumes and having a correct risk/reward ratio.
Deposit = $500
What if your deposit is $500? With a 3% risk ($15), your trade size can be 0.15 lots. In this case, each point of profit/loss will account for $0.15. With a bigger position size, you’ll be able to earn money faster! There will be 100 points for a Stop Loss. If you need a wider Stop, you can trade 0.1 lot, making each pip cost $0.1. The Stop Loss will be 150 points. With 5% risk ($25), you can allow a 250-point SL. The profit in this case (if your Take Profit is 3 times bigger) will be $75.
Deposit = $1000
If your deposit is $1000, you, of course, can open even bigger trades. The risk of 3% for a trade ($30) and 1:1000 leverage will allow you to trade 0.3 lots. The risk of 10% ($100) will allow you to trade 1 lot. In this case, 300 points of profit will account for a gain of $300. The optimal risk of $30 a trade will allow you to trade 0.1 lots with the SL of 300 points. The potential gain will be $90.
Things to remember about account management
Another important thing: remember about Margin Calls and Stop Outs. Margin Call is an allowed margin level of 40% and lower. At this point, the company is entitled but not liable to close all open positions of a client due to the lack of free margin. Stop Out is a minimum allowed level of margin (20% and lower), at which the trading program will start to close the client’s open positions one by one in order to prevent further losses that lead to a negative balance (below $0).
If you abide by risk management rules and don’t put your entire deposit in trading at once, you’ll be safe from Margin Calls and Stop Outs.
Remember that there are demo accounts that allow you to practice trading without investing a single dollar. Or euro. Or whatever. The size of a demo account with FBS can be up to $1 million. The demo account will allow you to practice opening orders and setting position sizes. Use the amount you really plan to invest in trading. In this case, everything will be realistic, and you will be able to practice trading and get a model of how the account may change in size when you trade for real.
Lesson summary
The bigger the trade you open, the bigger the profit/loss for each point of price movement;
The best solution from the risk management point is to limit the size of a single trade by 5% of an account;
Leverage allows traders to open trades of bigger volume;
Deposit and size of trade determine each other.
Coming up
In the next lesson, you will learn how to analyze the market to get buy and sell trade ideas.