How to Determine Pip Values, Position Size And Lot Size When Forex Trading?
As an example, on one day using the strategy you are taught you stop loss distance may need to be 20 pips away.
If you have a £2,000 Forex account you may choose to risk £10 for every pip. That would mean if that trade was to go bad you would lose 10 x 20 pips = £200, or 10% of your capital. Now lets assume that on another similar trade your stop loss needs to go 80 pips away. £10 at 80 pips = £800, or 40% of your capital – Obviously that is far from ideal.
Let’s look at how you will be dealing with this same scenario.
You decide that you are going to risk 2% of your capital on each trade, that would be £40. If your stop loss was 20 pips away that means that you are going to risk £2 per pip, and if the trade goes bad all you would lose is a total of £40. Now on the next trade with your stop loss at 80 pips, your pip value would be £0.50 per pip, meaning that the most you would lose is still only £40.
Use The Power of Money Management In Your Forex Trading Routine
Many traders, even some who are very profitable (perhaps more luck than skill!) do not understand nor apply the simple concept just explained.
From this point on whenever you enter a trade you should always determine where your stop loss position is first, as this will determine your position size, then when it comes to entering the trade you will know exactly the number of contracts you need.
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