How to Calculate Your Lot Size Correctly & Easily

Podcast:

#374: How to Calculate Your Lot Size Correctly & Easily

In this video:

00:26 – Understanding Lot Sizes

00:58 – The problem with the way most people trade

01:57 – Different pairs pay a different amount per pips

02:50 – Place the stop loss at the correct level

03:29 – Use my Lot Size Calculator

04:48 – Allows you to be smart with your trading

05:21 – Weekly chart trades made good money this week

06:11 – Controlling risk and your emotions

How do you calculate the lot size that you need on every trade so that you can control your risk and your emotions? Let's talk about that and more, right now.

Hey Forex Traders, Andrew Mitchem here at the Forex Trading Coach with video and podcast number 374.

Understanding Lot Sizes

I thought I'd come outside today as it's a lovely winter's day here in Nelson. Lots of good feedback on last week's video, when I took you on a helicopter trip. So glad that you enjoyed that and I figured, well it's so good, let's get outside again today and explain the very important topic regarding what makes the difference between potentially a losing Forex trader and a successful Forex trader. It comes down to money management and risk and understanding how to calculate the lot size that you need.

The problem with the way most people trade

You see, the problem is that most people when they trade is they will put on 0.1 lots or 1.0 lots, something like that. I did exactly the same 16 plus years ago when I started trading. Because that's what you think you should do. When you see people showing trades online they'll put something like, you get paid $10.00 per pip and if you make 100 pips that equals $1,000.00. The problem is that's not quite right. It's quite a bad way of trading. Let me explain why. In order to trade with low risk and controlled risk, what you need to do is actually calculate the lot size that you need on every trade that's specific to that trade. You can't just go and say, well I'm going to put on 0.1 lots on every trade. It's not a good way of trading because you're going to find that you have different risk on each trade.

Different pairs pay a different amount per pips

Different currency pairs pay a different amount per pip depending on what currency pair you're trading. But not only that, it also depends on what the account your trading is based in. For example, it may be in US dollars, it might be in New Zealand dollars, it may be in British pounds. So you can't just say that every trade is $10.00 per pip or $1.00 a pip, because that's assuming that you're trading something like Euro/US dollar or the Pound/US dollar, and your account is in US dollars. If it's not in US dollars, then the $10.00 a pip logic doesn't even make sense anyway, it's inaccurate. So that becomes the issue. Now it's so easy to look online and people showing you trades that they make, like I said 100 pips equals $1,000.00. No, it's not true. So you have to be quite careful there.

Place the stop loss at the correct level

What you need to do is actually place the stop-loss on the trade at the level it needs to be at. Don't just go and say I'm going to put a 20 pip stop-loss in, because 20 pips doesn't mean anything. You have to put that level at the price level where it needs to be for that specific trade. Then what you do is you then work out the dollars per pip or the pounds per pip of the currency that you're trading and according to your account denomination. Then you work the lot size needed for that trade. So that all starts to sound a bit complicated, doesn't it?

Use my Lot Size Calculator

The great thing about it is that I have a lot size calculator freely available on my website, and I'll put a link next to this video and podcast, that works on any MT4 or MT5 account and all you simply do is drag it onto the screen (it's a script, it's not an indicator so don't go putting it on the indicators folder it...