by SharpForex » Tue Jan 25, 2011 8:29 pm
Determine the percentage of your account funds that you are prepared to risk. Determine where you will place your stop, and calculate the dollar value between your proposed stop and the entry price. Now divide the percentage of capital you are prepared to risk by the dollar value between your proposed stop and entry price to determine number of lots. For example, assume you have $1,000 in account funds and you set a 2% ($20) risk factor (the amount you are prepared to lose if the trade moves against you). Assuming a Micro contract with a 10-cent pip value, if the value between your stop and the entry price is, say, 50 pips ($5.00), and you divide your $20 risk capital by this, the result will be 4 lots.
Why go to all this trouble? Because this method ensures that you do not exceed your risk factor whilst allowing you to maximise the advantage of a low risk trade. For example, if the stop value above were only 20 pips (low risk), you could trade 10 contracts whilst maintaining your 2% risk factor. Alternatively, if the stop value were 100 pips (high risk), you would only trade 2 contracts.
Trust this helps!