A lot size calculator is often talked about in risk management circles for retail trading, but how do you actually use one?
Thats what we’ll be covering in today’s article: a step-by-step guide for beginners to actually start using a lot size calculator for forex trading.
In Summary
Here’s how you calculate your lot size using a lot size calculator:
- Select your account currency (GBP, USD etc.).
- Choose the currency pair you will trade.
- Choose your direction & timeframe (optional)
- Enter your account size / balance
- Enter your risk % (how much of your account will you risk on this trade)
- Input your entry price
- Input your stop-loss & take profit
- Hit Calculate.
Our Beginner’s Guide to Calculating Lot Sizes
Step 1: Select Your Account Currency
On our lot size calculator you begin by choosing the currency of your trading account balance (e.g., GBP, USD, EUR). This is essential for accurately calculating your risk and position size against the base currency so we can do the necessary currency conversion if you are trading a USD pair with a GBP account for instance.
Step 2: Choose the Currency Pair You’re Trading
Next, select the currency pair you’ll be trading, for example, EUR/USD or GBP/JPY. This is important as you may be trading a currency that is different to the actual deposit currency!
- Understanding the Base Currency:
- In a currency pair such as EUR/USD, the base currency is the first currency (EUR), and the target or quote currency is the second currency (USD).
- Lot size calculators automatically factor in these currency dynamics when determining risk and potential trade value.
Step 3 (Optional): Choose Your Trade Direction & Timeframe
Whilst not directly relevant to the risk itself, this will help you understand whether your stop loss is below the entry price (buy trade) or above the entry price (sell trade). All of this will be pre-filled in your calculator or guided for you so you can understand this simply.
You can also enter your timeframe – this is something that we offer to put your trade into context – you can see how much you are risking (monetary or % terms) on a particular trade – and it really puts this into perspective…
Step 4: Enter Your Trading Account Balance
Provide your current total account balance. The calculator uses this amount alongside your defined risk to determine the correct lot size.
Step 5: Enter Your Risk Tolerance
Decide the exact amount you’re willing to risk on the trade. You can do this either:
- By percentage of your total trading account (most people choose 1-2%)
- By a fixed monetary amount.
Either is an acceptable way of calculating risk, but check out our risk management tips for more some more info on risk sizing for beginners.
Step 6: Input Your Entry-Level Price
Clearly specify the entry price at which you plan to open your trade if you want to ‘Enter Live Prices’ on our calculator. This is the exact price you expect to enter the market. This can be a limit order (you will open the trade at a certain level) or a market order (you enter the trade now).
Step 7: Specify Your Stop-Loss Level
Determine your stop-loss price level, the point at which your trade will close automatically to limit potential losses. This helps manage your risk effectively & also works in tandem with your risk to accurately calculate how much you will lose if the trade goes south.
You can also enter your take profit, this is optional but might help you understand the risk in context of your trade / how much the trade could make… all things going well!
Alternative Approach: Starting with a Lot Size
OK, this is unique way of doing it but something we’ve built into our calculator for UK traders to quickly calculate how much they are risking on a particular trade in monetary terms. We foud this to be useful for traders who usually have a set lot size in mind, but often don;t know how much this means in terms of actual money risked. To calculate this you will need to:
- Input your desired lot size.
- Adjust the entry and stop-loss levels accordingly.
- View the calculated monetary or percentage risk based on these inputs.
Step 8: Calculate Your Trade
Once all details are entered, click “Calculate.” The lot size calculator wil display:
- The correct lot size for your trade based on your inputs.
- Your total potential risk in your account’s currency.
- Pip value based on the selected currency pair.
Some tips for beginners:
- Always double-check your inputs (especially entry and stop-loss levels).
- Regularly update your account balance for precise calculations.
- Consistently stick to your defined risk management rules.
By following these clear steps, you can accurately calculate your lot sizes, manage your risk, and trade confidently and consistently.
