Stop Loss Mechanics / Contract Sizing

Discussion in 'Forex Trading' started by FXNewb, Apr 2, 2007.

  1. FXNewb


    Hey Guys,

    I am a new FX trader and need some help with contract sizing and stop loss 'mechanics'.

    Assuming my stop represents the total amount risked per trade (expressed as a percentage of
    total account equity) please find (hypothetical) numbers below:

    Account Size: 1,000,000
    Risk Per Trade: 1%
    Risk per Trade Notional: 10,000
    Leverage: 100 to 1
    Stop: 16 pips from entry

    Therefore, to calculate proper number of contracts required given amount risked per trade:

    Risked per trade / stop loss = stop loss pip value

    10,000$ / 16 pips = 625$ per pip

    625$ per pip / 10$ per pip (one standard lot) = # of standard lots required given position size

    = 62.5 standard lots OR 6,250,000 leveraged notional required.

    Is this right or am way off here???

  2. Rocko1


    Paper trade it, if it sucks, use a better exit strategy :)
  3. your resolution of 16 pips is extremely small, there is a way of figuring out what the appropriate resolution is and work backwards to figure out appropriate lot size.

    take the ATR(average true range) of the timeframe your trading. The ATR represents the volatility risk for that timeframe. If the situation is relatively static and for the last 24 hours, 1 hour ATR's have been 40 pips, but the ATR travels 110 pips your 1 hr ATR determines your stoploss pip count. And your 24 hour ATR determines you daily risk alotment.

    your using the market to figure out, what the variables should be rather then imposing your own view on it. so if the daily fluctuations have been 110 pips you work backwards using 110 pips as 1% of acct equity.

    Then using other metrics when the market deviates to the low end of the 110 or high end of the 110 range, you enter with direction of the larger trend. The direction the 110 pip ATR's are traveling.
  4. micro fluctuation resolution is extremely risky to base your leverage on. A larger resolution of what the largest waves been in the pair is a better way to quantify how much leverage for the volatility.
  5. actual usdjpy chart

    30M chart with 2bar ATR(1hr ATR).

    2bar ATR's running around 10 pips currently.

    if your a scalper your looking for a 10 pip deviation or oscillation wave against the larger trend.

    if your a longer timeframe trader 65 pip oscillation was the larger wave.

    if your willing to risk .65% on 1 lot on 100K account. You place a 65 pip stop loss at your entry point on 1 lot.
  6. FXNewb


    Thanks for getting back to me spectre!

    My numbers (including stop size) were purely hypothetical -- not intended to be taken literally.

    Just wanted to make sure I had the concept down!
  7. I would suggest not starting out with such high leverage. The fx industry wants you to use that leverage because your chances of getting wiped out dramatically increase. Make sure your system is working and you can make money for a little while and grow your account. Leverage can be used but just not so excessivley.

    good luck