From my observation, 80% of Forex traders seem to discuss on finding the best entry rather than discussing right money management. The More effort you place in managing money, calculating an optimal stop-loss and limiting losses will result in greater long term profits for you.
What lot size will you trade with?
In a proper money management, your Lot size is not fixed. It is dependent on two factors which are;
1. The amount you are willing to loss per trade and;
2. Your stop loss.
The first and most important step is to decide the amount you are willing to loss. If you have $1000 in your account and you place a trade of 0.4 lot size with a stop loss of 50pips. If this trade goes against your direction, you lose $200. This is not good because you are losing 20% of your capital in just a trade. It will only take 5 of such trades to liquidate your account. (We usually advice our clients, not to risk more than 2.5% of their capital per trade).
Secondly, define your stop loss and take profit. Stop loss and take profit are not fixed either. Your resistance and support tells you where to place you TP and SL.
Having said all these, we have a formula that will help you to calculate your Lot size for each trade.
Lot size = percentage of your equity you are risking /stop loss x 10
Let us apply this formula in a practical example
You have $1000 in equity and wish to risk 2.5% which is $25. Your spread is 3 pips (EUR/USD). Your stop loss is 90 pips based on resistance and support level + 3pips spread =93pips in total
Using our formula, Lot size= percentage of your equity you are risking /stop loss x 10
Our Percentage of your equity we are risking= $25
Our Stop loss = 93pips
LOT SIZE = 25/93 x 10
LOT SIZE= 0.026
If you input the lot size of 0.026 in you trade, you will only lose $25 if this trade goes against your direction.
Why calculate your lot size?
Using this formula, you only risk a small percentage of your equity on each position which means your risk is proportional to your equity and provided you stick to stop-loss you choose, are protected from financial ruin and only have the potential to lose the risked amount. Hope this helps J