How does volatility affect lot size? Alternative opinions
Volatility is the area where the price of an asset changes over a certain period of time (a vivid example from a minute chart to a monthly chart in the terminal). This is a certain measure of risk when trading on a financial instrument, and if in simple words, then the rate of price change.
Lot - a unit of measure, the amount of funds invested in a trade operation. For example, in a dollar account with 1 lot, 1 point will be equal to 10 dollars.
There is a concept of money management, which takes into account volatility and lot. They are directly proportional.
Many traders prefer to determine the size of the traded lot based on the risk of the transaction, which they determine as a percentage of the deposit. In this case, it may not matter to them what kind of volatility the instrument has. They learned for themselves the concept of the price of a point, from somewhere they took it that all the charts are the same and now they are sure that the main thing is to trade according to the system, according to the schedule and everything else is not important.
Meanwhile, one should understand that before trading any instrument, one should familiarize oneself with its volatility. And so, based on this, and determine how much lot will be appropriate.
You can compare different instruments by what their standard lot sizes are and what their volatility is.
For the euro / dollar currency pair, we can find information that the average volatility over the past 10 weeks is about 83 points. And suppose a trader has a deposit of 10,000 rubles and trades this pair with a volume of 1,000 euros. And now, tired of him trading the same thing, the trader began to search for new suitable tools. Suppose a trader turned his attention to oil and now thinks whether it is worth trading, and if so, with what parameters to open positions.
Here you can see that when taking up new tools, many traders not only have no idea what kind of volatility is there, but do not even bother to find out what lot size is there. They simply click 1 or 0.1, and only then, experimentally try to figure out what these numbers are hiding.
And one would need to immediately find information about how much volume there is in barrels, in order to have an idea of what risks the trade may be depending on the size of the deposit. And to know that if 0.01 lot is 10 barrels, then this is worth more than $500, at current light sweet quotes.
Then you should pay attention to volatility. And to see that a few percent move for oil is quite common. And if the trader still has the same deposit of 10,000 rubles, then trading in oil in the amount of 1000 euros will be much more risky than a pair of euro dollars.
So, you should choose a lot less than the one that will be about 20 barrels.
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