Many forex traders are creatures of habit. If they have been used to trading currencies at 10 lots every time, they are likely to trade in much the same way in their future trades. In terms of prudent money management strategies, this is a wrong way of determining the size of every position you will be taking. You don’t just pluck a number from out of nowhere and decide that it is the number of lots you will be buying or selling. If you are to manage the entailing risks associated with forex trading effectively, you need to determine the position size according to the amount of capital you are willing to risk each time you decide to get into the market. Every professional trader does position size calculations before initiating a trade. You can also do it using free available forex calculators that automatically calculate the proper position size you should take. They are called position size calculators.
Forex calculators like this are very much a part of an effective money management strategy. Determining the size of position to take and at the same time setting your cut loss points and profit taking points is the best approach to trading in a volatile market such as the foreign exchange market. All three are essential elements of prudent risk management practices.
Position size calculators are not built in into the trading platforms used by many brokers but they are available for download and can be installed as a plug-in indicator into various trading platforms like the Meta Trader. It is easy to use as a drag and drop interface that can automatically calculate position sizes for you within the same platform. It is another essential forex calculator you must include in your forex trading arsenal.
What it does is basically help you determine the appropriate number of lots you should buy or sell to manage the maximum risk you should take per position. You simply input the currency pair to wish to trade, your account size, and the percentage of your account that you wish to risk, and this forex calculator will automatically calculate the appropriate position size that fits your risk tolerance level based on the information you have keyed in. If you have set your own custom cut point level, the position size calculator will determine your position size based on this cut point level taking your account size into consideration.
In other words, you just need to set the maximum percentage of your account which you are willing to risk and the position calculator will determine the corresponding maximum number of lots you should buy or sell; no more, no less.
Many traders buy or sell currencies on impulse. They close their trades in much the same manner quite often out of fear or nervousness when the market goes against their positions. More often than not, they lose money this way. The fact that there are more forex traders (80% by conservative estimates) who lose money than those who come out on the profit side is a naked witness to this. Position size calculators along with other forex calculators take away the subjectivity and guess work in your trading. They instill a trading discipline that many forex traders so badly lack.