In forex trading, calculating the exact size of your trade could be quite a challenge, especially given the fact that investors usually get different leverage ratios from their brokerage firm, and each broker offers different lot sizes.
For that purpose, using a lot size calculator is crucial to your trading success. Until you reach the point at which you can automatically calculate your positions’ size, you should absolutely use a position size calculator.
So, in this article, we’ll help you understand how a position size calculator works, and how you can easily and efficiently calculate your forex positions.
In this article:
Key Points to Take Away
- Lot size calculator is a simple-to-use tool available on many websites online. This includes our Switch Markets lot size calculator that helps traders find the right position size and manage trading risk..
- Leverage is the most important element of the forex markets and is often referred to as the double edge sword – the greater the leverage, the higher the potential to make profits, and the higher the risk of losing your capital.
What is a Lot Size Calculator?
Historically, FX currency pairs have always been traded in amounts called lots. But unlike the stock market, for example, where things are somehow easier to understand – in the forex market, position sizing is essential to manage the risk and to be comfortable with the size of your positions. As a tip – getting into a large FX position could be very stressful and create unexpected losses. So, this is where a lot size calculator, also known as a position size calculator, comes into play.
A forex position sizing calculator is a valuable tool that enables a user to know the exact details of a forex position before entering into it. The calculator is usually available on forex websites but it can also be found as an MT4 plugin.
When you are using a position size calculator to make a forex trade, you need to insert the entry point and the stop-loss location. These two inputs are the most important for understanding the size and risk value of your trade.
Different Forex Lot Sizes
Before we go into the ins and outs of using a forex lot size calculator, there’s one thing every trader needs to know about forex trading – that is, the different forex lot sizes. As already mentioned, the standard lot size in forex is equal to 100,000 units of currency. However, since the majority of traders cannot deal with this size of position (around $10 per pip), forex brokers have created different lot sizes that include mini, micro, and nano.
|Lot Size||Number of Units||Value per Pip||Initial Investment Requirement in USD|
|1 Standard Lot – 1.0 lots||100,000||1 Pip – 10 USD||1000 USD|
|1 Mini Lot – 0.1 lots||10,000||1 Pip – 1 USD||100 USD|
|1 Micro Lot – 0.01 lots||1000||1 Pip – 0.1 USD||10 USD|
|1 Nano Lot – 0.001 lots||100||1 Pip – 0.01 USD||1 USD|
How to Use a Forex Lot Size Calculator?
By now, you should understand the concept of a forex position size calculator. Luckily, using a position size calculator is not rocket science and is extremely simple to use.
To use the calculator in actual trading, you simply need to insert the inputs of your particular trade in order to get the calculation results.
For example, when using the Switch Markets lot size calculator, you’ll be asked to insert the following data: FX instrument, deposit currency. Entry-level, stop-loss rate, and risk tolerance (the amount you are willing to lose – fixed income or percentage risk).
So, as you can see in the above data, the fixed amount inserted in this example is $250 and the stop-loss rate is 93 pips below the entry price. According to this data, the Switch Markets position size formula makes the calculation and helps investors to know the exact position size needed for this trade, which is, in this case, 0.26 lots.
What is Leverage And How to Use It As Part of Your Trading Strategy?
Clearly, one of the key features of the forex market, for better and worse, is using leverage ratio (also known as margin trading). In simple terms, a leverage ratio in forex means you can essentially borrow funds from your brokerage firm in order to be able to trade with higher capital. How is that possible? Largely because the forex market is primarily speculative, meaning that forex brokers can provide leverage for their users.
But to better understand the concept of leverage in the forex and CFD markets, you can view our video below explaining what leverage is, and how much leverage you should use as an independent trader.
More Risk Management Tools to Use
Using a Forex position sizing calculator is an excellent way to calculate the size of positions and know how much money you are risking in a certain position. Besides this tool, there are other useful risk management tools you need to take into account, especially if you are making the first steps as a trader.
- Pip Value Calculator
- Currency Strength Meter
- Forex Profit Calculator
- Value at Risk Calculator
- Leverage (Margin) Calculator
The Bottom Line – A Position Size Calculator is a Handy Risk Management Tool
To sum up, knowing the pip value and the position size in every forex transaction you are going to make is not so easy. For some people, it can take months and even years to calculate these metrics, particularly if you are trading multiple assets. This is because you need to consider the lot size (standard, mini, or micro), the leverage ratio you are using, and the currency pair you are trading. For that matter, you certainly should be using the tools available out there to make informed decisions. One such tool is the position size calculator.
With a number of inputs, a good position sizing calculator will help you find the exact size of your forex position and evaluate the risk of your current account balance you are going to risk in the next trade.
Most traders and experts will say that ideally, you should not risk more than 1%-2% per trade of your account balance. On the other hand, most day traders typically risk even more than the above per trade (around 3%-5%) as part of their trading strategy due to the low risk of getting in and out of position in short timeframes.
That largely depends on the amount of capital you have invested, the trading strategies you are going to use, and your financial goals. If you have a small account with a balance below $1000 and you are going to take medium to long-term positions, then you should only use mini and micro-lots. Otherwise, if you are an active intraday trader, you can use the standard lot size as long as you are maintaining other risk management approaches such as the risk-reward ratio in a single trade, stop-loss orders, etc.
Here’s what you need to do to calculate XAU/USD pip value – multiply the amount of your position in lots by the size of the position in oz and then multiply by the current price of golds. The formula – (Volume in lots) x (100 oz.) x (price). Regardless of the formula, generally, the pip of gold is valued at $1 when opening a lot size position, 0.1 for a mini lot position, and 0.01 for a micro lot position.
The risk-reward ratio is a risk trade management tool that measures the profit of a given trade against the loss of the same trade. For long and swing traders, the ideal risk-reward ratio stands at around 1:2 or 1:3, meaning the investor is willing to risk 1 USD to potentially make a profit of 3 USD. For day traders and scalpers – the most recommended risk-reward ratio falls at 1:1 and below.