On the financial markets risk is money that can be lost, that means what percentage of the deposit you can afford to lose per trade. When trading, risks are inevitable, and the best thing we can do is to learn how to manage them.
Determine your risk
Risk is calculated as a percentage of the total amount of the deposit and depends on the trading style. So, determine your position size and set a risk limit you will risk on each trade. As a rule, it is recommended to risk of no more than 1-2% per trade at conservative trading. At moderate trading, it is allowed to risk 5%, at aggressive trading – 10%. It is usually used to upgrade a small deposit. A limit is set by placing Stop Loss when opening any trade. I would recommend risking no more than 2%-4% of the deposit in each transaction.
Let’s say you have $1,000. If you risk 1% of your account on the trade, you could risk $10 per trade.
$1,000 x 1% (or 0.01) = $10
Find your Stop
As you know, Stop Loss is set to limit the possible losses if the market moves against the position. Traders can use key support and resistance levels to place Stop Loss. Count the number of pips from your open price to your stop order.
Determine a lot
Here it is necessary to take into account two previous values: the risk percentage and the number of pips to your Stop Loss. Divide the dollar amount risked and amount risked by Stop Loss to find the value per pip.
$10/20 pips = $0.5/pip
For example, there is a deposit of $1,000, the risk is 1% of the deposit amount, and Stop Loss is 20 points from the entry point. Hence the cost of one pip will be $10/20 points = $0,5 (50 cents). So, it is recommended to open positions of no more than 0.05 lot, since the value of 1 point is 10 dollars for the 1 standard lot.
This calculation refers to pairs, in which the dollar is in the second place, i.e. EUR/USD, GBP/USD, AUD/USD etc.
But you can make the process of calculation easier. In order not to calculate manually, you can use the Forex calculator. Many brokers offer traders such calculators which can be found on the website. The calculator calculates the potential profit and loss according to the given parameters: currency pair, currency of deposit, volume, Stop Loss and Take Profit.