Position Sizing by Counting Transaction Lot
Trading is the art of managing opportunity and risk. Risk management aims to minimize risk in transactions and maximize profits so that the portfolio grows. Position sizing is a very important risk management strategy. See the following discussion in full.
Many think that a trading strategy with a high level of accuracy is everything for consistent profits. Even though risk management is the most decisive factor for someone between becoming a trader with consistent profits or even consistent losses. Many think, the greater the capital used, the greater the profit that can be obtained as long as the accuracy of the trading system is high (assume 80%). So that you don't get confused in calculating it, let's review some things related to the calculation later:
Value Per Pip
Pip stands for "Price Interest Point" which is a unit for measuring changes in exchange rates between two currencies. Pip is sometimes written as pips in English. Pip describes how much profit or loss occurred. To calculate it requires 3 things, namely the currency pair being traded (because different currencies have different values), the base unit of currency used (USD in general), the amount of value traded.
For currencies whose value is expressed in 4 decimal places, one pip is equivalent to 0.0001. For example EUR/USD from 1.1230 price rose to 1.1237, meaning there was an increase of 7 pips. As for currencies whose value is displayed with two decimal places, one pip is equal to 0.01. For example, USD/JPY from the price of 100.09 dropped to 100.01, meaning that there was a decrease of 8 pips. Generally all currency pairs consist of 4 decimal places, except those involving JPY.
Example calculation:
You use USD in your trading account and buy EUR/GBP for 500,000. If EUR/GBP moves 1 pip, how much is it worth in USD?
EUR/GBP means EUR as the main currency or 1 EUR equivalent to how many GBP. So if you buy a position worth 500,000 units, it means 1 pip is equal to 50 GBP. While your account is denominated in USD, now calculate the value of 1 pip in USD.
Assuming GBP/USD = 1.25.
So 50 times 1.25 = US$62.5,
This means that 1 pip in this transaction is worth US$62.5.
Risk Allocation in USD
This means how much money will be risked in 1 transaction. Usually the amount varies from 1%, 2% or 5% for experienced traders, but if you are a beginner, 1% is recommended. It aims to protect the account from serious losses from only a few transactions. To be able to make consistent profits and not only make occasional profits, it is important to protect your account so you don't lose big in just a few transactions. Because every time you lose, you need a higher percentage of profit than before to return to the main capital.
Example:
If the capital is US$10,000 and the allocation is 1%, each time you make a transaction, you only use US$100 in capital. So the risk is no more than US$100.
Determining the Amount of Stop Loss
Determination of the stop loss value indicates how much risk you can accept and does not threaten the health of your portfolio. The principle in determining the stop loss is that the value must be smaller than the portion of the profit target. Some recommended loss and profit ratios are 1:2 or 1:3. This means stop loss 1, target profit 2, and so on.
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