[Request for Experts] Complete Formula to calculate Lot Size

[oddpip]

I want to risk a fixed % of my account for each trade I make,
but obviously, the account equity/margin is changing after every trade 🙂

So, to make it follow the growth of my equity/balance,
I want to adapt the LOT SIZE every time I trade.

I need the formula to calculate the correct LOT SIZE
corresponding to the chosen % of my equity.

I would like that the formula will include all these factors:

ACCOUNT TYPE (1.000, 10.000, 100.000)
TICK SIZE FOR THE CURRENCY PAIR (0,0001 for EURUSD)
LEVERAGE (100, 200,..., 500)
CURRENCY PAIR QUOTATION
ACCOUNT EQUITY (MARGIN)
RISK %

Is someone able to help me?

With the formula I will make a little spreadsheet and I will post it here.

Thank you very much

Michele

 

[Enivid]

Leverage has nothing to do with Risk %. At the same time, stop-loss is important for this formula. You won't be able to get the position size without knowing your stop-loss in pips. For EUR/USD and account in USD, the formula would look like this:
((Risk % * Account Margin) / Stop-Loss) / 10.

 

[oddpip]

Leverage has nothing to do with Risk %.

A loss of (for example) 70 pips
@ leverage 1:50
@ leverage 1:200
@ leverage 1:500
are the same?

Am I risking the same money?

 

[Enivid]

Of course. Your actual loss in money depends only on the position size and the amount of pips lost in this position.

 

[JFogel]

Your first mistake is used fixed fraction over fixed ratio. Most people don't know what their largest expected drawdown is. If you have this information, look up fixed ratio and you will see a golden difference once you understand the concept.

 

[Enivid]

Your first mistake is used fixed fraction over fixed ratio. Most people don't know what their largest expected drawdown is. If you have this information, look up fixed ratio and you will see a golden difference once you understand the concept.

Could you please explain more?

 

[JFogel]

Using fixed-fraction to determine when to increase your unit size is inefficient to begin with, and dangerous near the end.
Say you are trading 1 standard lot with a $10000 account, and you only increase to 2 standard lots once 10% of the account growth has been achieved. You will be trading 2 standard lots for $11,000. That's not so bad. Slow, but not bad.
Now, when you have $1,000,000, you can only increase 1 more standard lot size when you get to $1,100,000. So before, you could increase one standard lot size per $1000, but now you have to wait until you have increased $100,000 to add a lot size. Sounds absurd, right?

Fixed ratio solves this dilemna, displaying the best ratio of account growth before an additional lot is added. If you find the largest expected drawdown of you system, you have the delta value for the equation. Using this equation, if you had $1,000,000 and needed to know when to hit the next level, you could get $33,030 and be within reason, whereas fixed fraction demands that you add $100,000 before adding an additional standard lot.

 

[oddpip]

I have found what I was searching for:

A formula to adapt the trade/position max VOLUME to the actual BALANCE of my account.
​

(this solution doesn't include currency conversion)


I need these data:

ACCOUNT TYPE (1.000, 10.000, 100.000) (micro, mini, standard)
LEVERAGE (100, 200,..., 500)
ACCOUNT BALANCE
RISK % (for example 5% of my BALANCE)
​

ACCOUNT MARGIN = ACCOUNT TYPE / LEVERAGE

Example: 1000 / 200 = 5
​

RISK = ACCOUNT BALANCE * RISK%

Example: 1000 * 5% = 50
​

MAX VOLUME = RISK / MARGIN

Example: 50 / 5 = 10
​

This allow me to use the max volume available without exceed the risk limit. 🙂
(If you want to keep open a number of position, you have to subdivide the volume by them)

 

[Enivid]

Using fixed-fraction to determine when to increase your unit size is inefficient to begin with, and dangerous near the end.
Say you are trading 1 standard lot with a $10000 account, and you only increase to 2 standard lots once 10% of the account growth has been achieved. You will be trading 2 standard lots for $11,000. That's not so bad. Slow, but not bad.
Now, when you have $1,000,000, you can only increase 1 more standard lot size when you get to $1,100,000. So before, you could increase one standard lot size per $1000, but now you have to wait until you have increased $100,000 to add a lot size. Sounds absurd, right?

Fixed ratio solves this dilemna, displaying the best ratio of account growth before an additional lot is added. If you find the largest expected drawdown of you system, you have the delta value for the equation. Using this equation, if you had $1,000,000 and needed to know when to hit the next level, you could get $33,030 and be within reason, whereas fixed fraction demands that you add $100,000 before adding an additional standard lot.

If you read the original post of this thready carefully, you'll see that the author talks about risking a percentage ratio of his account margin, not about a fixed position size per each increment of the account balance.

 

[Enivid]

MAX VOLUME = RISK / MARGIN

Example: 50 / 5 = 10
​

What's "50" here? 50 pips stop-loss? 50% of balance risk allowance?

 

[oddpip]

What's "50" here? 50 pips stop-loss? 50% of balance risk allowance?

50 units of the account currency

 

[Enivid]

50 units of the account currency

OK, now I get it. But then your calculations just don't make sense:

ACCOUNT MARGIN = ACCOUNT TYPE / LEVERAGE

Example: 1000 / 200 = 5
​

RISK = ACCOUNT BALANCE * RISK%

Example: 1000 * 5% = 50
​

MAX VOLUME = RISK / MARGIN

Example: 50 / 5 = 10
​

This allow me to use the max volume available without exceed the risk limit. 🙂

For example, if you use 10 standard lots position size and have a stop-loss of 10 pips triggered, you'll loose $1,000 - that's 100% of your balance, not 5%.

Knowing that your position size is 10 lots doesn't control your risk per position unless you know what's your stop-loss...

 

[oddpip]

Ok, thank you Enivid, I understand what you mean:

If i have, for example, a 1000 $ balance and want risk only the 5% = 50 $
I have to calc the stop loss this way:

STOP LOSS = RISK SIZE / PIP VALUE

Now, knowing the STOP LOSS, how I calculate the correct VOLUME size?

 

[Enivid]

Ok, thank you Enivid, I understand what you mean:

If i have, for example, a 1000 $ balance and want risk only the 5% = 50 $
I have to calc the stop loss this way:

STOP LOSS = RISK SIZE / PIP VALUE

Now, knowing the STOP LOSS, how I calculate the correct VOLUME size?

It's a bad idea to base your stop-loss on your risk tolerance. Stop-loss is derived from a trading system, not money management, and you should base it on your technical analysis or fundamental analysis. Your position volume should be derived from the stop-loss.