How much you can afford to lose on one trade
Lot size is not a matter of instinct. Decide first what you can afford to lose on a single trade, and the size follows from where your stop sits.
Fix the amount first
Decide what share of your capital you can lose on one trade and keep going. On 500,000 JPY at 2%, the limit is 10,000 JPY per trade. That figure does not move with your last result.
Work back from the stop
Say your stop on USDJPY is 50 pips away. One lot is 1,000 JPY per pip, so 50 pips is a 50,000 JPY loss. With a 10,000 JPY limit you can hold 0.2 lots. Tighten the stop to 25 pips and 0.4 lots fits the same limit.
Wide stops mean small lots
The further out your stop, the smaller the size. Wanting a larger position means moving the stop closer, not ignoring it. Raise the lot size without that trade-off and one bad trade takes most of the account.
Keep the record
Log your limit and your actual loss on every trade. If the limit keeps being exceeded, the problem is the procedure, not the judgement.
This column is provided for information only and is not a recommendation of any trade or method. Trading decisions are your own responsibility.
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Foreign exchange trading carries the risk of losing your invested capital, and higher leverage increases that risk. Please consider the risks carefully and trade only within a range of loss you can bear.
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