Risk management

Starting this subject it is necessary to introduce the notions of investment size on the Forex market. The basic investment unit is 1 lot. It is fixed value of 100000 units of the base currency. There are also minilots, which equals to 0,1 lot =10000 units of base currency. Apart from it, we have microlots and they are equal to 0,01lot = 1000 units of base currency.
An example: let me count how much 1 lot is worth for my pair, which is GBP/JPY.
The calculations depend on currency which is used for account management, e.g. USD. Next thing is to make a calculation on this pair: USD/JPY. The first currency, USD (an account runs in this currency) and the second currency, JPY for which I would like to calculate the value of one lot.
Calculations:
100000 units (1lot) divide by actual exchange rate of USD/JPY. All of it multiply by 0,01 and then 1 pips USD/JPY which is:
100000/90,13(rate of exchange for 22.01.2011)*0,01+11.09$ for one pips, which is equal to the pair GBP/JPY because counter currency is JPY (that is the second currency).
Simply, when you invest a value if 1 lot, which is 100000$ (with financial leverage), you earn or loose 11,09$ on 1pip.
Now, you will see the same calculations on the pair EUR/USD:
100,000/1(rate of exchange USD/USD)*0,0001= 10$
The value of 1 pip is equal to 0,0001 for all the currency’s pairs apart from pairs with JPY for which it is the value of 0,01.
There are different leverages for different platforms. If you wish to see how much 1 pip’s value is, (taking into account that the value of 1 lot may differ and with one given currency - the currency that you use to manage your account) it is necessary to put on a given pair the value of SL for 100pips and then to see how much money had been taken for the protection of a given position. We divide this sum by 100, the result is the value of 1 pip on a given account for a given pair.
The risk – how to deal with the size of a position
The most common mistake of the novice investors (and not only those) is that they invest huge amounts of money, the money is out of proportion to the deposit’s size. My fundamental rule is having maximum of 1%, which means that in your case 1 lot or 0,5 of lot etc. (or the value of few positions) should not exceed to more than 1% from the whole deposit on your investment account. Working with too big positions leads to a drawdown of our capital and to clearing out of our account. Forex currency market is not regulated, there might appear a lot of surprises and you are never able to predict what kind of day comes. For this reason, it is crucial to beware of the risk so that our work is easy and stress-free. Being greedy very often equals ending in failure or a loss of capital, the capital which you worked on really hard.