The easiest way to use the calculator to calculate the value of the lot on the forex.
Why even calculate the lot size:
- Optimization of the position volume in relation to the deposit amount, taking into account the risk and the desired return on investment, allows you to balance the trade.
- The correct selection of the lot and the procedure for increasing the position allow you to choose a trading mode in which the general position of the trader will be resistant to drawdowns, corrections, kickbacks, and volatility.
The above was an example of what a lot in Forex is and how its volume is formed. One of the forums provides an interesting example of calculating a lot “from the contrary”, based on the level of risk. As already mentioned above, 1 point on one standard lot gives an average of $ 10 profit. Or a loss, depending on which direction the price will go. An analysis of the statistics on the instrument shows that corrections for the currency pair can reach 20 points, that is, a loss can amount to $ 200.
There are two approaches:
- The approach of taking the average value of volatility as the basis. It allows you to increase the volume of the lot in the framework of the inherent risk. The trader assumes that the average (most probable) loss can be, for example, only 10 points, therefore he opens a deal with a large volume (uses larger leverage). But then the deposit remains unprotected against abnormal volatility – a loss of 20 points can lead to the closure of stop-out transactions.
- The approach of taking as a basis the worst-case scenario – maximum drawdown. The maximum possible volatility is taken as a critical point, that is, a stop loss of 20 points is taken into account. In this case, you will have to reserve more money, but such a system will be less risky.
Do not forget to add a spread to the calculated stop loss setting level.
The risk management strategy should also provide for the maximum risk of the transaction. The theory recommends keeping a mark of no more than 5%. If we assume that in our example, the potential loss of $ 200 is 5%, then to trade 1 lot within the acceptable risk with predicted volatility of up to 20 points, you will need a deposit of $ 4,000. There is not so much money – we reduce the volume of the lot.
Another guideline is the amount of collateral that the broker reserves when using leverage. In theory, it should not be more than 10-15%, but this guideline is not the main one. Firstly, the greater the leverage, the less the collateral. Reduced collateral pushes to open transactions in a large volume, increasing risks.
From the above examples, I think that the principle of calculating the lot should be clear. The trader evaluates his deposit, decides on the appropriateness of applying leverage, in accordance with the risk management (acceptable level of risk per transaction and general position) determines the target volume, translates it into lots. In practice, everything is somewhat more complicated, since currency pairs are different and sometimes it is necessary to calculate the value of a point in those pairs where USD is not and a cross rate is required. Most companies offer their own calculators on sites for help, the general essence of which is the same: the trader indicates the currency pair, lot size, position direction, the calculator calculates the point value and profit (loss) based on current quotes.
As an example, I’ll give the LiteForex trader’s calculator, which, like other analogs, is convenient, but not without drawbacks. It allows you to calculate the amount of loss or profit on such input data as a currency pair, position volume, transaction direction, type of account and leverage.
Keep in mind that for one standard micro lot, the price of a point is $ 0.01, not 0.1, as I wrote above. The reason for this: 5 decimal places in the quote instead of the 4 usual ones.
The ability to calculate the risk is not provided, it will have to be done manually. And one more minor inconvenience – there is no way to set leverage of 1: 1. Let me remind you that the amount of leverage does not affect the risk if there is a clearly defined goal in terms of position volume. With a constant lot size, a change in leverage only affects the amount of the deposit.
When calculating the value of a point, you should pay attention to what the display of a currency pair is. For example, the price of a point in a pair of EUR / USD is $ 10 with a standard lot on Forex. In the pair USD / JPY, the value of a point will be equal to less than $ 9. The calculation formula, in this case, will be as follows: (1 point * lot size) / market price. An example of the calculation result is given below.
Almost all trader’s calculators have one and the same problem: there is no way to calculate the lot size with reference to the level of risk, although this is precisely the meaning of the planning of trading volumes. I propose to use the following formula to calculate the lot with reference to the level of risk:
Lot volume = (% risk * deposit) / A * (Price 1 – Price 2)
% of risk – this is the amount of the deposit that the trader is ready to allocate for the transaction (the very notorious recommended 5% that I wrote about above). A is a coefficient equal to one for a long position, for a short one – a unit with a minus sign. Price 1 and Price 2 – opening price and stop loss level. The stop loss level, in this case, is one of the options for interpreting the average or maximum volatility, which I also wrote about above.
How to calculate a lot on Forex. Example. The following inputs are available:
- Deposit: $ 3,000
- Risk – 5% per trade.
- Leverage – 1: 100.
- Stop length – 50 points.
The transaction amount will be 3,000 * 100 = 300,000 US dollars. If we are going to invest 100% of the money in one transaction, then the maximum lot size for EUR / USD 1.2500 is 2.4 lots. But we are going to adhere to the rules of risk management. Allowable risk per trade is 3000 * 0.05 = $ 150. Since we can afford a maximum drawdown of 50 points, the maximum allowable cost for us for a point is 150/50 – $ 3 per 1 point. Let me remind you that for a standard lot, the cost of a point is $ 10. Therefore, the maximum allowable maximum lot is 0.3. The minimum lot size is 0.01. For a 0.3 lot, you need $ 37,500, we invest $ 375 (12.5% of the deposit, which corresponds to the risk management rule) and use a leverage of 1: 100.
Thus, the lot size directly depends on what drawdown the trader will take into account in the calculations. Here, the simplest model in Excel will be appropriate, which will show the dependence of the lot on the drawdown (or stop value).
The second method of calculation using leverage provides that the maximum risk of all open positions should be no more than 15%. 3000 * 0.15 = $ 450, which with a leverage of 1: 100 is $ 45,000. Divide the position by the current rate (for example, 1.2500 for EUR / USD ). 45000/125000 = 0.36 lots. The result is almost similar to the previous one, but I do not like this method. It does not take into account drawdown.
If a trader adheres to the strict rule of “a fixed percentage of a deposit per transaction” and “a fixed percentage of a deposit for all transactions in the market,” then the leverage does not play a role. The larger the lot volume, the higher the value of the item and the faster the deposit will melt in the event of a price reversal.
Output. Lot size depends on:
- The volatility of the asset and the choice by the trader of the method of its assessment (level of stop-loss).
- The level of acceptable risk for all open transactions, which each trader determines individually.
- Deposit Amount.
- Leverage (depending on the calculation method).
In trading advisors, the initial lot size is set in the “Lots” parameter. You can also use the automatic lot calculation system by turning on the UseMoneyManagement parameter, indicating the level of risk and the size of the maximum lot.
What is a lot in other markets
In other markets, the definition of a lot is fundamentally different from Forex terminology:
- Binary options Here the lot is the rate that the trader makes, predicting the price movement in one direction or another. The bid expression is monetary. That is, there is no lot as such, but a bet step is provided.
- Stock market. Since the price of shares may range from a few cents to thousands of US dollars, the approach to the terminology of the lot is different here. On the Moscow Stock Exchange for VTB securities one lot is 1 thousand shares, for securities of some oil companies 1 lot is equal to one share. NYSE and NASDAQ in most cases set the value to “1 lot = 100 shares”, it is almost impossible to buy a fractional lot.
- Derivatives market. Here the approach to determining the lot and calculating its volume is even more complicated. It takes into account the price step specified in the specification, stops level and risk, and the result is measured in the number of contracts. Who is interested in a more detailed formula, ask in the comments.
Output. Assessing the level of risk and calculating the maximum allowable lot size is one of the foundations of a risk management system. Deviations are allowed. In volatile markets, the risk level for each transaction makes sense to lower, but at the same time increase the length of the stop. On trending, on the contrary – it makes sense to put shortstops and use the technique of increasing the position. Before the start of trading, it makes sense in the historical period to calculate the minimum, average and maximum length of stops (separately for each instrument) and prepare a model that will allow you to quickly change input data and adjust the volume of transactions in case of changing market conditions. Still, have questions – write them in the comments. And success in trading!