Any trade involves the observance of rules of risk management with the goal of saving your Deposit in case of damages. There are no common recommendations in this regard, each produces for himself, but the generally accepted figure is not to trade a lot more than 1% of the Deposit. There is not a lot information on the Internet about how to calculate lot size — apparently the majority of traders are guided by their own intuition and personal calculations. However, if this information would not have been the actual series of the brokers would be placed on their websites calculators to calculate lot size.
Lot size in futures trading on the FORTS market
FORTS — (Futures and options RTS) the Russian derivatives market, with derivatives trading. That is the example of futures trade for FORCE I will tell you about the way of lot size calculation. The challenge is how to calculate lot size from the 1% of the Deposit that the trader assumes to risk.
Initial data necessary for calculation:
- deposit sum;
- allowable risk per trade (in percent);
- entrance price;
- stop-loss level (in points, as well as in rubles);
- price step;
- step price;
- the amount of collateral.
All items except the Deposit amount, refer to the reference and are listed in the contract specifications. Below is a screen with similar specifications with the parameters of the contract. Please note that the parameter “cost of price step” depends on the dollar / ruble exchange rate and is variable (changing every day).
For calculation as a basis take the following data:
- Deposit amount — 120 thousand rubles;
- the risk of the transaction — 2%;
- the price step of the asset — 10;
- cost of the step (as you can see from the screenshot) — 10,065 рублей;
- the cost of entry and stop — of 99.00 and 98.2% respectively.
Stepwise calculation consists of 4 easy steps 1-2 mathematical operations:
- Determine the level of risk in the transaction in rubles: 2% from 120 thousand rubles 2400 rubles.
- Calculate what should be the stop loss level in points (the cost of entry — the cost of the step). In our case 99,0 — 98,2 = 0,8 (or 800 points).
- Translate the obtained value of stop loss in points in rubles (stop loss in pips divided by the price and multiply by the cost of step). In our case: 800 points/10 (from screen)*10,065=805 roubles.
- Consider the lot size (i.e. number of contracts) per trade, divide allowable risk on stop-loss, both values in rubles. The volume of futures contracts = 2400 / 805 = 2,9 or if to round 3 contracts.
In other words, to meet the generally accepted strategy for risk management under source settings, you need to open a transaction with no more than 3 contracts. I think you noticed that the calculations didn’t use the parameter “margin”. Collateral — a pledge that sets the exchange for each contract. It is needed to determine how generally you can purchase contracts for the amount of the available deposit.
For example, let’s reduce the stop loss from 800 to 100 points, recalculate the number of contracts according to the above formulas and get the value “24”. However, we will be able to open only 6 contracts. Why? Because the maximum amount is the Deposit, divided by the collateral. In our case it is 120 thousand rubles/19,438 (figure collateral taken from the contract specifications). Got 6 contracts.
To simplify the task you may create simple calculator in Excel, by driving the above formula in the cell. And believe me, it would seem that nothing difficult in calculating the lot there, and the urgent need for this is also missing. But in practice the observance of the rules risk management is a sign of discipline and guarantee of minimal losses.
Summary: lot size — not less important parameter than the stop loss. But if the maximum number of contracts it is an exchange restriction, the maximum level of risk each defines for himself independently. For example, if previous calculations of 2% to replace 10%, we get a total of 15 contracts. Fortunately, exchanges limit the risks of irresponsible traders, who are at risk from all the deposit, but in opposition to them are the brokers that offer customers the leverage. Because these calculations are also true for margin trading, but leverage is a distortion of the actual amount of the deposit. Therefore the advice is: learn how to calculate a stop loss and lot size before using leverage.
Good luck with your trading in the futures markets!