Trading Forex is all about knowing what your risk to reward is when you enter market and being able to tolerate or feel comfortable about the trade. This single most determining factor for understanding risk/reward is the amount of leverage used during trading or number of lots. The smaller the lot size the lesser the risk so it’s easier to tolerate equity swings giving you more control over the speed of drawdown which in turn gives you more time to make a timely decision.
Risk/Reward is determined by knowing what you’re willing to risk or lose when you enter the market vs. what your reward or gain will be on the given trade.
Leverage on account is due to lot size vs. account size. Pip (Price Interest Point) increments forex trade in. Pip Value is determined by lot size which controls the risk/reward.
3 Types of Lot Sizes
Micro Lots .01 = Amount Trading $1000 = .10 pip value
Mini Lots .10 = Amount Trading $10,000 = $1.00
Standard Lots 1.0 = Amount Trading $100,000 = $10.00
Example of Risk $10,000 Account
Micro Lot: 0.01 Leverage; .1:1 or $1000 traded against $10,000 Pip Value .10. Every 100 pip move is $10 or a .01% equity swing or draw down
Mini Lot: 0.10 Leverage; 1:1 or $10,000 traded against $10,000 Pip Value: $1.00. Every 100 pip move is $100 or 1% equity swing or drawdown.
Standard Lot: 1.00 Leverage; 10:1 or $100,000 traded against $10,000 Pip Value: $10.00. Every 100 pip move is $1000 or 10% equity swing or drawdown.
So you see it’s the lot size that determined the risk. The higher lot size is what causes the greater risk/reward. The leverage factor was based on lot size as well. When we used a micro lot it was only trading $1000 against the $10,000 account so it was less than 1/1 leverage which is very conservative.
When we geared up to a Standard lot 1.0 we were using $100,000 against our $10,000 which was aggressive. This meant our account value was fluctuating based on a $100,000 investment in market so your equity swings or amount of volatility on your account was based on $100,000 investment and not $10,000 which meant your risk/reward was much greater.
We of course strongly recommend only using 1:10 leverage to start trading with Multi30 until your able to fully understand your risk. Capital Preservation #1 Rule of Trading.
With an account deposit of $4000 start trading with .40 lots which is $40,000 notional value trading against $4000 thus 1:10 trading leverage. If you have questions email me at [email protected]
Leonard D. Neuhaus, Jr.
Qualifications: Started on Wall St. 1984 and has been trading for over 15 years in forex market. Designed or developed his own trading system EAU AutoTrader which is now available and being offered to students of his University. Have been on numerous seminars around the world and has taught hundreds of traders successfully. Has past all these test at one time or another during his career: Held Series 7, 6, 63, 34, 3, life, ethics and code.