Contents
The Risk of Trading Forex
What are Forex calculators for? Predominantly, risk management. As traders, we should know that the only thing we can have complete control over is the risk we take with each trade we place. Nobody can predict the future, and the market is always right. Therefore, as risk is the only part that we can fully manage, we should take advantage of this to our benefit.
As a forex trader, we buy or sell currencies listed in pairs, such as EURUSD, USDCAD, GBPUSD. These represent Euro (EUR) vs. U.S dollar (USD), U.S dollar (USD) vs. Canadian Dollar (CAD), and so forth.
In Forex, the currency pairs are traded in “lots,” where one lot, also known as a standard lot, represents 100,000 units of the pair’s base currency. What does it mean? Well, a picture says a thousand words.
For the major pair EURUSD, the “base currency” is Euro, and the “quote currency” is the US dollar. Remember that in Forex, when you buy, you are purchasing the “base currency” and selling the “quote currency,” and when selling is the opposite, you sell the “base currency” and buy the “quote currency.”
Related: How to Trade Forex With Tradeview
Managing the Risk Using Forex Calculators
To be a professional trader, your trading system should have a pre-defined risk ratio as a percentage. This percentage is based on your balance or equity; for instance, you have a $ 1,000 account, and your system has a 1% risk ratio per trade, which means that your maximum risk should be 10 dollars for each trade you enter.
Facts:
- Your trading system should have a pre-set risk ratio.
- Once you increase or decrease your risk, you should keep it fixed for a predetermined period such as 100 trades.
Always keep in mind that every trading strategy has an expected outcome, and if we keep changing our risk, we are destroying the edge of the strategy, letting our emotions and opinions interfere with the probabilities.
Professional traders don’t know the future either; they just develop their trading system, set rules, and follow them by the book.
Learn to manage risk with a Demo Account before you start trading with your own money
How to manage the risk?
The risk will come from the distance in pips that exists between your entry-level (EL) and the stop-loss (SL). Once you plan your trade, you can quickly get that distance in pips using your charting software.
There is a value per pip that is only fixed when the “quote currency” is US dollars. For instance, in EURUSD, the value per pip is $ 10, GBPUSD the same. But when it comes to cross pairs or major pairs where the “quote currency” is different from the US dollar, the value per pip is different. This link gives the value per pip in real time.
Let’s get to work on some examples with market entries to show what I just explained.
Example 1
Trade: Short Entry
Type: SELL-STOP
Pair: AUDUSD
Distance from EL to SL: 14 pips
R:R | 1:4
Example 2
Trade: Long Entry
Type: BUY-LIMIT
Pair: GBPJPY
Distance from EL to SL: 42 pips
R:R | 1:4
Easy right?
With the pips‘ distance, you can easily calculate the lot sizes for your trades and always trade your trading system’s risk ratio.
Pip’s distance, with the value per pip and the risk ratio, you can get the number; however, why go through the hassle to obtain these numbers manually when we have excellent online tools to get the lot size number.
Here is where the best Forex calculators came into play.
There are a bunch of good online forex calculators for this matter. Allow me to show you some of the best ones available for your reference.
Now, let’s get to work. Following the exercise, let say the:
Account Balance: $1,000
Risk Ratio: 1%
Risk in USD: $10
Using a Forex Calculator Example 1:
Trade: Short Entry
Type: SELL-STOP
Pair: AUD.USD
Distance from EL to SL: 14 pips
R:R | 1:4
Q: What should the lot size be to risk $10?
A: 0.071
1. Choose the pair
2. Currency of your trading account (USD)
3. Balance
4. Risk Ratio%
5. Stop-Loss in pips
Using a Forex Calculator Example 2
Trade: Long Entry
Type: BUY-LIMIT
Pair: GBPJPY
Distance from EL to SL: 42 pips
R:R | 1:4
Q: What should the lot size be to risk $10?
A: 0.026
1. Choose the pair
2. Currency of your trading account (USD)
3. Balance
4. Risk Ratio%
5. Stop-Loss in pips
The screen captures for these exercises come from MyFxBook position size calculator.
As a final note, we should always stick to our trading system:
- Never use fixed lot sizes (it’s a big mistake)
- Once you choose your risk ratio, a good recommendation is to not change it until after at least 100 trades
- Plan your trade, and please trade your plan
- Never jump in a trade due to FOMO (Fear Of Missing Out)
- Develop a trading routine
- Use your strategy to improve the odds to give you an edge
- Enjoy life
All good long-term investing and trading systems require proper position sizing. I hope this article and the best forex calculators in it will help you improve your system and trading skills, in the meantime, may the market be with us.
Quote of the day
“Success is a lousy teacher. It seduces smart people into thinking they can’t lose”
Bill Gates
