Introduction to the Lot Calculator Risk Management Tool Indicator
Risk Management is one of the most basic elements traders should learn in order to avoid having their accounts wiped out within a few trades. Trade sizing is the most basic form of Risk Management. This indicator was developed to help traders pick the appropriate trade size based on their Risk Management protocol.
What is the Lot Calculator Risk Management Tool Indicator?
The Lot Calculator Risk Management Tool is a risk management indicator which allows users to easily calculate for the correct lot size to arrive at their desired risk on each trade.
The Lot Calculator Risk Management Tool displays all the information necessary for traders to manage their trading risk appropriately. This information is displayed on the upper left corner of the price chart.
“Your free margin” shows either the balance of the trade account or the approximate balance in which the trader would want to use for calculating the trade size.
“Risk selected” shows the risk on each trade as a percentage of the trade account or approximate balance.
“Risk selected” shows the absolute risk on each trade based on the currency of the trading account.
“Value of one pip trading 1 lot of…” shows the value change per pip per lot if a trade is opened.
“Max lots of (currency pair) to trade while risking (risk in pips)” shows the maximum lot size based on the selected risk percentage and risk on the stop loss in pips.
How the Lot Calculator Risk Management Tool Indicator Works
The Lot Calculator Risk Management Tool uses a simple algorithm which calculates for the risk by dividing the absolute risk by the product of the pips between open order and stop loss and the pip value for a 1 lot trade.
Lot Size = (Free Margin * Risk Percentage) / (Risk in Pips * 1 Lot Pip Value)
All these variables can be retrieved from the trader’s account and from the broker’s price feed.
Traders simply have to modify the input variables which are the risk in percentage form and the risk in pips.
How to use the Lot Calculator Risk Management Tool Indicator for MT5
The “Inputs” tab of the Lot Calculator Risk Management Tool is very important as it allows the users to modify the variables used for the lot size formula.
“Stop loss distance from open order” refers to the risk placed on the trade based on the distance of the stop loss from the projected entry level in pips. Traders should modify this based on their desired stop loss distance.
“Free margin fraction you want to risk for the trade” refers to the portion of the free margin you are willing to risk on each trade. This in a decimal form on the Inputs tab but this equates to the “Risk selected” value on the display, which is in percentage form.
“Check to read the actual free margin of your balance, uncheck” toggles the indicator to use either the actual free margin or a projected free margin.
“Specify here a simulated balance value” refers to the projected free margin that the trader would like to use as the Free Margin variable.
Conclusion
This indicator does not provide trade signals and trend indications. However, this indicator is a very important tool because it allows users to project their risk on each trade. This allows traders to properly manage their risk which is vital for a profitable trading strategy.
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