Posted by forex at 1:12 AM
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1. Identify the 'lot size' of your Forex account. A 'lot' is the multiple of currency units that designates your trade size. It is also the smallest number of currency units you can trade (one lot). Typical Forex accounts use 100,000 as the lot size. This is risky, so many 'mini' Forex accounts use lots of 10,000 units, while 'micro' Forex accounts use lots of only 1,000 units. Smaller lots mean you can make smaller trades and reduce risk.
2. Total the asset value of your Forex account. This includes cash and open positions. This total is typically shown as your 'account balance.'
3. Identify the size of the Forex trade you plan to execute (or have already initiated), as a number of lots.
4. Determine the profit target or maximum loss you will accept on the trade. In Forex, you trade on 'margin.' The percentage of risk in the account is based on the trade's outcome as much as it is the trade's size. If an exchange rate is currently 1.23, you may plan to exit the trade at 1.25 for profit, or 1.21 for loss. It is critical that you make these plans prior to initiating a trade, as trades with no exit strategy are risky.
5. Calculate the percentage of the account risked on the trade by multiplying together the account's lot size, the number of lots traded and the difference in the exchange rate over the course of the trade. Then divide this number by the total account balance.For example, a typical Forex account with a 10,000 lot size and account balance of $10,000 would lose 2 percent on a change in interest rates from 1.23 to 1.21 if only one lot was traded. This is the exchange rate difference, 0.02 multiplied with 10,000 (the lot size) and 1 (the trade size), with this result divided by 10,000, the account balance. As an example, to maintain a 2 percent risk level, you would need to exit the trade at 1.22 if you traded two lots instead of one.