The Importance of a Lot Size Calculator in Risk Management

October 23, 2022 0 Comments

Calculating the risk for every trade you take is crucial to your success as a trader. The steps and logic behind this process are thoroughly explained in our lesson on how to calculate lot size and risk, which is part of our free forex school. As you might have noticed while going through that lesson, the procedure of calculating the exact lot size you need to use is simple. However, it is tedious and time-consuming, especially when you are faced with a situation where you want to enter the market instantaneously before the price moves the slightest from your entry point. Therefore, our forex lot size calculator will come in handy as a tool you can use efficiently every time you want to enter a trade. 

Risk management

 Risk management is one of the most crucial determinants of a trader’s long term success in the market, because it helps us cut down losses and reduces the probability of losing our capital in the market. When choosing the lot size before executing a position, there are almost no limitations, but in order to satisfy the possibility of fulfilling his long-term goals in the market, each trader must comply with some rules regarding risk management. Managing risk means having a specific plan regarding the risk associated with each transaction you take on the market. 

How to use our lot size calculator

First, you need to determine the percentage of capital that you are going to risk on a given trade. We suggest that this percentage remains the same over an extended sample of trades, and that it does not surpass 2%. In simpler terms, if you risk any amount from 0-2% per trade consistently over a long period of time, it is almost impossible to lose your capital due to incorrect position sizing. Once you have determined the portion of capital risked on every transaction, the other pieces of input are discovered when examining a specific market speculation idea.

After selecting the currency pair that you wish to trade, and the currency of your trading account, type your account size, risk (in percentage), and stoploss (in pips) on the calculator above just as shown in the example below.

Lot size calculation on the MarketNerd lot size calculator (example)

After you have successfully calculated the correct lot size for your position, make sure to use this exact position size when executing a trade on MetaTrader 4, or any other trading software you might be utilising. 

Calculate forex profit

We have gone through the process of calculating the correct lot size before entering a trade. Another important aspect of money management is to calculate the profit of a forex trade prior to execution. You can do this simply by multiplying the amount of money you wish to risk, with your reward:risk ratio. If you’re risking $200 on a trade with a 10 pip sl and your target is 30 pips, your RR ratio is 3:1. By multiplying 3 with the amount of capital risked, you get $600, which is the potential profit for this trade. 

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