Questions about lot size and money management

[NeGem]

Hi, I am new to trading. I have a question about lot size and money management.
If I have an initial capital of $500 and playing with a leverage of 20:1, this would mean that I am able to control a maximum of $10,000 while trading. Let say that I want to risk 4% of my capital for each trade and have a stop loss of 20 pips. How do I determine the lot size

For example:
I am planning to trade the EUR/JPY with an initial capital $500 with a leverage of 20:1. If I am risking 4% of my capital, am I risking $400 ($10,000 x 4%) or $20 ($500 x 4%)? If I am risking $400 and I want to have a stop loss of 20 pips, does that mean each pip would represent $20? Also, if I am risking $400, would't I be risking 80% of my initial capital ($400/$500)?

Thanks

[ilovetro]

I would like to share my limited knowledge.

If you wish to risk 4% of your capital, the amount that you would risk is $500 x 4% = $20.

To calculate the lot size you need to know the pip value of EUR/JPY. I presume you are trading micro lot account, then each pip = $0.1041 (in USD) (you can find out pip value her http://www.goforex.net/pip-calculator.htm)

Here's the equation to calculate lot size:

Lot size = Risk amount / (Stop Loss x Pip Value) = $20 / (20 x $0.1041) = 9.606 = 9.6 micro lot

I think leverage have to do with margin requirement. Can someone shed some light on this?

[john225]

Look at this calculator
http://www.earnforex.com/position_size_calculator.php

[ilovetro]

Excellent link, john225. it automates the whole process

[NeGem]

Thanks ilovetro and John225! It is indeed a very good site