Understanding entry size is the first step in making good trading decisions. It's absolutely a must in order to avoid margin call.
My forex brokers determine a margin call based on usable margin and not on account balance or equity. Thus I make my entry decision based on my usable margin.
Learn more about margin basics.
Let's put my entry size strategy to practice on EUR/USD pair.
I have chosen leverage of 1:200. So technically I will need to maintain a usable margin of 0.5% or higher at all time after I open my trades.
However my broker requires me to add a small cushion as a safety-net besides 0.5% margin requirement.
Next, let's determine margin and entry size for a mini account, i.e. 10K per lot that pays $1 per pip.
Say I have a usable margin of $10,000 to begin with. I want to make ONLY 1-2% entry based on my usable margin of $10,000.
= $10,000 x 2%
Hence, if I make a 2% entry trade, my usable margin will be reduced to
But how do I determine how many mini lots should I trade to stay within my 2% entry range?
Let's do some math here...
For 1 mini lot (=10K per lot) at 1:200 leverage, technically I need only 0.5% as a margin per trade.
Margin = (Current Price x Trade Size x Margin Requirement) x 100%
In this case, say EUR/USD is trading at 1.3160
Margin = (1.3160 x 10,000 x 0.5%)
However, my broker adds a small cushion besides $65.8 in margin requirement.
So I need $75 as a margin on 1 mini lot trade.
This means I can trade 2 mini lots and use 2 x $75 = $150 as a margin.
If I am really comfortable then I may as well trade 3 mini lots instead and use 3 x $75 = $225 as a margin.
Calculating Entry Size Chart
Similarly, I can trade 4 mini lots and use up to 3% of my usable margin as seen in the above chart.
= $10,000 x 3%
So 4 mini lots require margin of 4 x $75
= $300 Used Margin
My Usable Margin
= $10,000- Used Margin
= $10,000 - $300
My Usable Margin Percentage
= (Used Margin/$10,000) x 100%
= ($9,700/$10,000) x 100%
If you refer to the forex entry size chart above, then you will notice that my usable margin percentage is above 90%. And this is the goal behind understanding calculating entry size strategy.
I always...always stay above 90% usable margin percentage to avoid margin call.
No forex brokers will ever teach any trader on these basics; however, they will slap traders with thousands of indicators instead.
What good is any indicator if a trader simply does not understand these basic money management rule?
The bottom line is if a trader has a sound understanding of money management and follows strict forex entry rule of 2-5% of usable margin at all the time, the trader will more likely avoid margin calls.
So how do you determine your entry size?