Get out of catastrophic Forex margin call: Forex Risk Management Method


How do you determine the position size? The
position size is counted in units of Lots. There are two aspects to look at
when trading: account risk and trade risk. Following is the steps to identify the
lot size.

  • Limit the account risk for each trade.

Most importantly, you should only risk 1~2 % of your account.

For example, if you have $20,000 in account, risk $200~400 per

Otherwise, there is also a fixed dollar amount to set in place for
each account.
For example, as long as your account balance is above $20,000, you risk $200
per trade or less.

There are variables come in to play while trading, so you should
choose how much you can risk for each trade. Do not fluctuate the risk
percentage and keep the consistency.

  • Find the Pip risk.

With maximum account risk decided, next is to find the pip risk by
deciding the entry point and stop loss order. The stop loss will close the
position at the minimum or maximum profit point that you’ve estimated. The Pip
risk calculated from the difference between entry point and stop order.

Before you enter a position, you must decide the stop loss point
closer to the entry point. After you decide the Pip risk, then you can
calculate the appropriate position size.

  • Calculate the Position size

The equation for appropriate position size:

Pip risk    x    Pip value     x   
lots traded = $ at risk

Here, “Lots traded” is the position size. Assume the 1% risk for
$20,000 account is $200. You’ve entered EUR/USD trading at 1.3050 and the stop
loss is at 1.3040, which is 10 pips at risk. For mini lot trade, the pip
movement is $1 each. Then, 1 mini lot position for the condition described
above results in $10 at risk. However, with 1% risk limit, you can risk up to
$100, so you can take 10 mini lots in position (same as 1 standard lot).

Ex) $10 (Pip Risk)   x   1 (Pip Value)   x  10
lots (position size)  =  $100 (account risk tolerance)

When you are risking $10 with 10 mini lots,
you are risking $100. This is the exact value for account risk tolerance. Plug
in any values in and get the appropriate position size. When you put the pip
value for micro lot, the formula will calculate the position size in micro
lots, and vice versa for standard lot pip value.

Word of advice:

Establishing and finding appropriate
position size is your key to Forex risk management. Keep in mind that based on
account risk and pip risk, you are setting the position size. There should be a
lot size that is not too littler nor too large. Find the sweet range for your
maximum profit expected to minimize the chances of getting Forex margin call.

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