How to determine the volume of a forex transaction?
When trading on the foreign exchange market, it's important to choose the right Forex trade size. This will determine the stability of your position against sharp trend fluctuations and the comfort of your trading experience.
This seemingly simple step raises a host of questions, and this article will address them. Some novice traders believe they should always trade at the maximum possible volume, making a fatal mistake.
Forex transaction volume is the amount for which an order is opened, taking into account the leverage used. It is entered when opening each new order.
When choosing a trade size, it's important to consider such important factors as the deposit amount, trading timeframe, trading strategy, and trend dynamics.
Only after analyzing these indicators will you determine the optimal lot size, which will allow you to trade calmly with minimal risk.
1. Deposit size – if your account balance is large, this allows you to significantly reduce risks by reducing the volume of trades. For example, when trading with a deposit of $10,000, there's no point in opening a position larger than 1 lot. This could allow you to profit handsomely and withstand a 20-30 pip correction, or close the position with a small loss.
It's a different matter if you only have $100, but you still want to make money. In this case, you should choose a trade with a volume of 0.1 lots. Trading in this case becomes more risky, but 1 point of profit will bring you $1.
2. Timeframe – There is a clear pattern whereby most traders trading on short timeframes choose the maximum available forex transaction size.
After all, the price is unlikely to change more than a couple of points in one or two minutes, so the risk of losing all your money is minimized. Therefore, the shorter the time frame, the greater the volume of transactions and the amount of leverage used. This approach allows you to maximize your profit from your funds; this type of trading allows you to increase your deposit several times in a single trading session.
3. Price movement dynamics – usually, when looking at a currency pair chart, you can see how the price moves over a given time period, how many pips constitute the main trend movement, and what the correction size is. The correction size plays a key role. You should hold on to the position until the next pullback or, conversely, maintain the position to prevent a significant drawdown of your deposit.
This indicator is used as a basis for calculations. For example, if the correction value is 15 points and the account has 100 US dollars, then you can open a transaction with a volume of 0.1 lot.
4. Maximum loss amount – this indicator is usually only taken into account by traders with at least several thousand dollars in their accounts. According to generally accepted rules, the loss on a single trade should not exceed 2-3 percent.
Let's take the sum of 100 units again, and a Forex trade volume of 0.1 lots. It turns out that we should stop trading as soon as losses reach $3, which rarely happens in practice. Therefore, we should reduce our trading volumes several times and trade with much smaller volumes.
As you can see, there are many approaches to determining the optimal trading volume on the Forex currency exchange. Your task is to apply them correctly based on your situation, taking into account all the above parameters.
