Futures markets have fixed tick values (i.e. the value of the smallest possible price movement), so calculating the size of a trade on a futures market (i.e. the number of contracts that can be traded) is quite straightforward, as long as you know where to find the information that you need (i.e. the contract specifications).
Here's How:
Tick Size and Tick Value - The tick size is the smallest possible price change, and the tick value is the value of the smallest possible price change. The tick size and the tick value are provided by the contract specifications for each futures market, either directly as the tick size and tick value, or indirectly as the tick size and contract value.
For example, for the EUR futures market, the tick size is 0.0001, and the contract value is $125,000, and the tick value is calculated as the contract value multiplied by the tick size which equals $12.50:
Tick Value = $125,000 x 0.0001 = $12.50
Maximum Acceptable Risk - The maximum acceptable risk is the amount of money that you are willing to risk for an individual trade, which obviously can be whatever amount you choose, but according to the 1% risk management calculation the maximum acceptable risk should be 1% of your trading account.
For example, for a trading account with a balance of $50,000, the maximum acceptable risk is calculated as the trading account balance divided by 100 which equals $500:
Maximum Acceptable Risk = $50,000 / 100 = $500
Trade Size - For futures markets, the trade size is the number of contracts that are traded (with the minimum being one contract). The trade size is calculated using the tick value, the maximum acceptable risk, and the size of the stop loss.
For example, for a trade on the EUR futures market (which has a tick value of $12.50), with a stop loss of ten ticks, and a maximum acceptable risk of $500, the trade size is calculated as the risk divided by the stop loss in ticks divided by the tick value which equals 4 contracts:
Trade Size = $500 / 10 / $12.50 = 4 (rounded to whole contracts)
Example - The complete calculation for the trade size (as one formulae) is as follows:
Trading Account Size / 100 / Stop Loss Size (in ticks) / Tick Value = Trade Size
which for a trade on the EUR futures market, for a trading account with $20,000, and a trade with a stop loss of ten ticks, is as follows:
$20,000 / 100 / 10 / $12.5 = 1 (rounded down to whole contracts)
