Trade size is an important factor of risk management
Larger lots increase profits and losses per pip
Use the Risk Management App to simplify your calculations
One of the important steps when day trading, is deciding how big your position should be. Position size is a function of leverage and while trading a large position may multiply a win, it can exponentially increase the value of a potential loss. This is why traders should always consider position size in trading. If too much leverage is incorporated in any given position, there could be unnecessarily devastating affects to ones account balance. To help, today we will review how to determine the correct lot size for your trading.
Before you can select an appropriate lot size, you need to determine your risk in terms of percentages. Normally, it is suggested that traders use the 1% rule. This means in the event that a trade is closed out for a loss, no more that 1% of the total account balance should be at risk. For example, if your account balance totals $10,000, you should never risk losing more than $100 on any position. The math is fairly self-explanatory, and you will find the basic equation used below. Once you have a risk percentage in mind, we can move to the next step in determining an appropriate position size.