Volume is one of the important factors in trading any instrument including forex. Large sales volume without being accompanied by the same volume of demand can cause the price of an instrument to fall, and vice versa. This means, a large trading volume has the potential to earn large profits and losses.
Therefore, it is not uncommon for traders or investors to be confused about what order volume is suitable for trading in a certain trading time period. Here are some ways to determine the order volume that suits your trading style:
How to Determine the Order Volume
1. Fixed size
The first way is that you trade a currency with a fixed amount of volume in each trading session. For example, suppose you sell $100 in 10 sales when the value of your equity is $1,000.
The advantage of this method is that it is easy to understand so it is suitable for beginners to apply. In addition, it is possible that the spread costs you have to pay are also constant so they are easy to calculate.
The downside is that you can’t maximize profits because you can’t sell or buy multiple currencies when the price of that currency is high or low.
2. Based on price
The second way to determine the volume of the order is based on the price of the instrument. For example, the value of your margin equity is IDR 1,400,000 and the exchange rate of USD against the rupiah is 1 USD which is equal to 14,000. So with IDR 1,400,000 and assuming there are free transaction fees, then you can get 100 dollars or 1 nano lot.
To implement this volume order trading strategy, you must know in advance how much money will be used to buy one currency and how much capital will be used to buy other currencies or other instruments. Because, diversification is important in trading.
3. According to the percentage of equity
In addition to the price, you can also determine the order volume with the total equity you have. The greater the percentage of order volume compared to total equity, the greater the trading risk you have to bear. Therefore, this trading volume ratio should be no more than 1%-2% of the total equity so that when you lose, you don’t lose all the equity you have.
The formula for calculating order volume using this method is:
Order volume = Equity * Risk (%) / Amount willing to trade * Leverage
For example, you have a total equity (including floating profit and loss) of $1,000 and your risk ratio is 2%. If you want to trade 10,000 lots and the broker offers 1:100 leverage, then the maximum total trading volume you can trade is:
Order volume = 1,000* 2% / 10,000 * 100 = 0.02 lots.
The advantages of this method are firstly, the amount of volume you trade can increase along with the increase in the total equity you have. Second, this approach is suitable for traders with minimal capital. The drawback is that even though it has defined risk, this approach still doesn’t calculate at what level the stop loss should be set.
4. Determine the order volume with stop loss The formula is:
Order volume = Equity * Risk (%) / (Stop Loss in pips * Desired transaction amount in pips)
In using this approach, you must remember that a pip is 4 digits after the comma so when the price changes 1 pip for a standard contract (100,000 units) the equivalent of $10 is obtained from 0.0001 x 100,000. So, if you want to trade 1000 lots of currency, then the pip value is 0.01 (0.0001 x 1000).
Here are some steps to determine order volume using this approach:
Determine the risk percentage. Again the percentage risk is not recommended above 2%.
Set stop loss level by pip count. For example, you want to buy EUR/USD at a price of 1 EUR equal to 1.0600 USD and the stop loss level is set at the EUR/USD level 1 Euro is equivalent to 1.0620 USD, then your stop loss level is 20 pips (1.0620 USD- 1.0600 USD).
Plug the results of points 1 and 2 into the above formula.
You have a total equity of $1,000.
risk percentage 2%.
The exchange rate of 1 EUR is equal to 1.0600 USD.
Mtop loss is set at the level of 1.0620 USD.
You want to trade 100,000 units or standard lots. In pips, this is equivalent to 10 USD (0.0001 x 100,000).
So, the total order volume that you can trade in order to break even is:
Order volume = 1000 * 2% / (20* 10) / 100= 20/200=0.1 standard lot.
5. Using Kelly Criterion
The Kelly criterion is a mathematical formula formulated by John L. Kelly Jr in 1956. Soon after its publication, this theory was widely used to determine trading volume and the amount of bets in gambling.
In this approach, you determine the amount of trading volume based on the historical probabilities of winning and losing that you have previously obtained.
The formula for the Kelly Criterion is:
K = p x B (1 – p) / B
K = Total trading volume in Kelly Criterion.
p = Percentage of the probability of winning.
1 – p = Percentage of loss. This variable is usually also denominated with q.
B = reward/risk ratio that traders are willing to sacrifice. For example, if a trader is willing to sacrifice all his potential profits, then the value of B is equal to 1/1.
A trader wants to start trading. He is willing to sacrifice all his profits to trade so that the value of B equals 1/1. If in the previous trade the winning ratio was only 65%, then what is the amount of trading volume that can be bet?
K = p x B (1 – p) / B
K= 0.65 x 1 -0.35)/1
K =(0.65 x 1- 0.35)/1
K = 0.65-0.35/1
K= 0.30 or 30% of the total equity so if the total equity you have is $1000, then you are advised to trade with a volume equivalent to $300.
In this approach, traders are not advised to start trading if the value of B=p/q or when the total risk/reward ratio is equal to the historical percentage of wins and losses that have been obtained previously.