BEGINNER’S GUIDE: Lot Management

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Increased profit through Forex lot management.Since 2006 I have spent hundreds of hours speaking to countless Forex traders of varying experience and skill level. And one thing that stands out in those conversations is the lack of understanding and confidence in Forex lot management namely: trading multiple lots. Understandably so, because the Forex market is volatile and rapid changes in currency values happen on a daily basis. Trading multiple lots can increase profits or losses; multiple lot trading can increase risk and action needed per trade. There are many factors to Forex lot management; for this article we will be focusing on trading multiple lots as “Forex lot management.”

Increased profit through Forex lot management:

The most basic concept is that if you are trading 3 lots for example, you will triple you profit or losses with each trade. But the real potential for increased profit comes from increased exit opportunities. Consider the following trades:

  1. For this trade your stop limit is set 30 pips below entry price and your exit level is set 35 pips above entry price on three lots. After your order fills, the market makes a +98 pip move. You bank +105 pips.
  2. Same trade as above, This time your stops are set -30 below entry price, lot one is set to exit +35 pips above entry price, lot two is set to exit +65 and lot three is set to exit +85. The market makes the same +98 pip total move as above however, in this example you have maximized your profit potential. You bank +185 pips.

In the first example we have a good outcome on the surface but if you consider that you are risking -90 pips to gain +105, you see that the risk/ reward ratio is not favorable. In the second example, you see that we have a positive risk/ reward ratio and have maximized our profit potential. Another benefit to example #2 is you are now taking advantage of the big moves that occur in the market rather than only taking profit at low levels.

Forex lot management and increased risk:

Staying with our 3 lot example it is easy to spot the increased risk when trading multiple lots. If we have misjudged the market and stop out; we have tripled our losses. This will happen from time to time, but if your Forex lot management is good, you can tip the scales in your favor on trades that don’t go as well as expected.  Consider the following trades:

  • Like example #2 above you trade three lots all with a stop level of -30 pips below entry, and exit levels of +35, +65, and +85 pips above entry. But in this case the trade only moves +42 pips then turns around falling several pips below entry stop levels.
  1. Lot one banks +35 pips; lot two and three stop out -30 pips each for a loss of -25 pips (Poor risk management.)
  2. Lot one banks +35 pips; when lot one reaches exit level you move stop to entry price for lot two and three. Lot two and three stop at entry and you end up +35 pips.
  3. Lot one banks +35 pips; you move lot two and three to +10 above entry. Lot two and three stop out at + 10 pips respectively. Trade profits +55 pips.
  4. Lot one banks +35 pips; you move lot two and three stop level to +25 above entry. Lot two and three bank +25 respectively. The trade profits +85 pips.

As clearly shown in the above example your Forex lot management strategy can greatly affect your overall performance. Considering you are able to determine correct market direction effectively; trading multiple lots can be an effective way to increase your profits and take advantage of the big moves. Conversely, the increased risk associated with trading multiple lots can be managed based on market conditions.

If the market is in a period of strong trending you may opt to use strategy 2 to allow the market room to breathe in hopes of a big move. Or if the market has been less predictable you may opt to go with a more protective strategy such as 4. While it does not allow as much breathing room to reach your higher targets, a strong move may still continue on to your highest target.

Look at your trading over the last few months and consider what the results would have been if you were trading 3, 4, 5, 6, or even 10 lots. How could you spread the exit levels to maximize your profit potential?  How does the risk/ reward ratio change? Look at the last 10- 20 trades that you have taken; how would these trades performance changed if you were trading multiple lots?

The most important part of the puzzle obviously, is knowing when to buy and sell in the Forex market. If you are struggling to find direction the last things you want to do is double, triple, or quadruple your risk. Practice trading multiple lots in a demo account and make your mistakes there. If you need help knowing when to buy and sell consider Forex trade signals or other trading assistance before upping the risk.

It is important to realize that there are many different strategies to trade multiple lots; and you as an individual trader must consider factors specific to your account. If you are trading a micro mini account multiple lots may be out of reach. On the flip side, if you have a substantial standard account, a losing trade will carry a substantial sting with multiple lots. So practice with a demo account that is similar in size to your live trading account.

Most traders find that they do much better in a demo account than live trading account for one simple reason. –No risk of losing money. A trader will take a losing trade and jump right back in the next opportunity without the apprehension that usually accompanies such trades. If you want to have a realistic look at your performance it is absolutely paramount that you trade just as you would in your live account.

 

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