Hello, surely you know the position size calculator of Myfxbook: https://www.myfxbook.com/forex-calculators/position-size Playing around with it a result kept popping up over and over again that I don't know what to make of. Assuming an account balance of $10.000, a risk ratio of 0.6% and a stop loss of 40. Applying that, for example, to the USD/JPY and it says I can trade 0.166 lots. That is more than I have in my account and I wonder how that can possibly be the case assuming that this calculator does not factor in leverage, so 1:1. With other pairs the number of lots even gets bigger. So, my question is how I can possibly trade more money than I have in my account (again, assuming the calculator works without leverage and assuming an account with leverage 1:1).
You want to risk $ 60,- on that trade, meaning with a stoploss of 40 pips; you should trade 0,166 lot. That's a little over 1/10th of a whole lot and a very small size...
He knows this already. Clearly it doesn't answer his question, does it? The calculator (correctly) doesn't factor in leverage, because leverage has nothing to do with the calculation you're asking it to perform. All the calculator is working out for you is the answer to this question: "given my stop-loss size, the value per pip, and the amount of money I'm willing to expose to risk on the trade (derived from my total funds and the fraction of that I select as my percentage per trade risk-exposure parameter) what's the maximum number of lots/mini-lots/micro-lots I can buy?" It says nothing at all about whether you can actually afford to buy them without using leverage. The reality is that almost no retail forex trader is trading without leverage, so it wouldn't be very helpful information. You can't. That's why you use leverage.
Ah, thank you, Xela, that cleared it up for me. Leverage does not have to be all that dangerous given a reasonable risk managment. So, what would be a good leverage to set for an account?
Absolutely right - leverage is not in itself dangerous: it's the ways it can be (ab)used by people who overleverage, and have unreasonable expectations of how quickly they can grow their account, and have poor (or no) risk-management skills, that cause the problems. (And they do tend to be the same people!). Unfortunately, for all the reasons and in all the ways mentioned here, many counterparty market-makers in the forex world, who are pretending to be "brokers", use the undoubted lure of very high leverage facilities as a way of attracting exactly the customers (I nearly said "victims"!) they want to trade against them. Throughout my days as a spot forex trader, I always used 50/1 or 100/1 leverage, myself, just because it made everything quick and easy to work out. In some countries (e.g. America) 50/1 is now the maximum allowed by law. Again, I don't think it matters all that much in itself: it's your overall risk-management skills that determine your fortune, really.
Indeed. This problem of which broker I can trust was one that gave me headache right from the beginning when I began learning about trading. I think with IC Markets I have found a good ECN broker (though I have not yet opened a live account, just a demo account, because I first want to get the basics of trading down).
Why does the lot size vary greatly depending on the currency pair at all? A lot is 100000 units of the base currency of a currency pair, so regarding for example the pairs USD/JPY, USD/MXN and USD/SEK (assuming the account currency is USD) they all should trade the same lot size given the same risk ratio and number of pips for stop loss. However, that is clearly not the case, it depends on the exchange rate. Why is that? If a lot is 100000 units of the base currency, then the amount of currency that the position size is worth in another currency should have no impact?