Lot Size – The Importance of Risk Management
As I have written before, risk management is the most important aspect in trading. If you can’t manage your risk profile properly, then trading is not for you. You can have the best technical and fundamental analysis skills but if you don’t have the same risk management skills, chances are that you won’t make it as a trader. Risk Management is simply a strategy that looks at your equity and then determines the amount of money you are willing to lose or gain per trade. There are many tools available that you can use to determine your risk tolerance. One of these tools is the lot size. A lot size is also known as the volume size. It is a number that represents the weight of your trade. For instance, if you have a $10,000 account and you place a trade with a lot size of 50, this means that you will make more money than another person who has a similar amount of money with a lot size of 2. Equally, if the trade goes south, you will lose more money than the other trader. In this article, I will explain a few factors that you should always consider when determining your lot size.
Lot Size – Amount of Money you have
First, you need to carefully consider the amount of money you have in your account. The more money you have, the better it is for you if you wanted to place a large lot size. For instance, if you have an account balance of $100K, then it would be easier for you to have a lot size of 10. If on the other hand you have an account with $1000, then it would not be appropriate for you to place such a lot size. In the first instance, you can comfortably lose $3000. This is because the margin call will be quite a distance. In the other instance, with the large lot size, you margin call will be triggered within a short duration of time. Therefore, the more money you have gives you an opportunity to place a bigger bet. However, it is always wise to use a small lot size as this helps you protect your money.
Lot Size – Duration of the Trade
The amount of time you anticipate the trade to remain open will help you determine the size of the lot size to have. If you want a trade that will last for a few days, then you should have a low lot size. If on the other hand you want a trade that will remain open for a few minutes or hours, then I recommend that you have a higher lot size. This is because of the fact that there could be huge movements in the trade. If this happens, in the trade you anticipate to last a few days then you will be protected with the reduced lot size.
Lot Size – The Asset you are Buying
There are different asset classes that are at your disposal as a trader. These include: currencies, commodities, equities, futures, and bonds. The asset class that you will buy will determine the lot size to use. For instance, in a EUR/USD trade, a lot size of 2 is not huge enough because the amount of money will be about 1.1023 per pip. On the other hand, the price for WTI is higher. Therefore, you should consider carefully the asset classes that you are buying to determine the lot size to use.
Lot Size – Risk tolerance
I have written before on the risk tolerance nature of trading. As a trader, you should always have a profile that determines the amount of money you can be comfortable losing per trade. You should use this risk tolerance to determine the size of the lot that you are to use. If you are a high risk trader, then you should use a higher lot size. If on the other hand you don’t like taking huge risks, then you should use small lot sizes.
Lot Size – Useful Links
- Find the Lot Size definition on Investopedia
- Find the Lot Size definition on Business Dictionary
- Find the Lot Size definition on Zillow