Kreslik.com - traders community since 2006

I see occasional formulas that confuse me, or see people using a default value for all pairs and time frames. But different pairs are more volatile than others, and larger time frames need larger stop losses.

This formula is so simple that even I understand it:

(AccountSize x RISK) / StopLoss

i.e. Suppose your account size is $500, and you are willing to risk up to 2% of your capital (2%-5% is the norm), and you have determined that a given trade needs 30 pips to breath (based on whatever method you use to determine where your StopLoss is). Then we have: 500 x 0.02 / 30 = 0.33

= 33 cents per pip. We have to round down to 30 cents.

This is the same 3 MICRO lots, 0.3 mini lots, or 0.03 full lots

So check your math: 30 pips times 0.33 cents per pip = $10
500 times 2% = $10


Hope this helps somebody.

Thanks!

So your account size dictates and your risk % (2%, 3%, 4% etc)

And the formula you provided calculates how many PIP spread on your trade.

So the higher your account size the more pips you can use as a stop loss based on you risk (2%, 3% etc)?

oldmangeezer wrote:Thanks!

So your account size dictates and your risk % (2%, 3%, 4% etc)

And the formula you provided calculates how many PIP spread on your trade.

So the higher your account size the more pips you can use as a stop loss based on you risk (2%, 3% etc)?

Not quite. The idea is to figure out your lot size i.e how much is each pip worth.

Well 2% should stay the same no matter what your account size.

Suppose I have $5000 account. and suppose I like to risk 2%. And suppose that I am playing daily charts only and have a stop loss of 150 pips. Then apply the forumula to figure out how much your pip is worth.

(5000 x 0.02) / 150 = 67 cents per pip. So this is about 7 micro lots. So you need to trade no more than 7 micro lots.

On the other hand if you are playing a hour chart, then you may determine that your stop loss is only 20 pips. In this case our numbers are:
5000, 2%, and 20 -- plug em in:

(5000 x 0.02) / 20 = $5 So you could play 5 minis (0.5 full lots) if you were risking 2% on a $5000 account with a 20 pip stop loss.

Determining what your stop loss is, is another matter, which I have not tried to delve into. It is often put at the lowest low in the last couple bars prior to going long. BUT I don't really want to try to deal with how you should determine stop loss

I am only trying to tell you how to figure out how large of a lot to play based on how large you stop loss is. In other words - how many cents or dollars is each of your pips going to be worth.