Position Size Calculation

As is our tradition, we'll explain everything using an example to make it easier for you to digest.

My name is Ned, and I'm a newbie.

He blew out his money a long time ago, when he was much more of a beginner than he is today, because he placed on some massive positions.

He traded like a gun-toting cowboy from the Midwest, trading from the hip and trading BIG.

Ned's money suffered as a result of his lack of understanding of the need of position sizing.

He registered again in WikiFX to ensure that he thoroughly comprehend the material this time, and to ensure that what happened to him never occurs to you!

We'll teach you how to calculate your position size depending on your account size and risk tolerance in the examples below.

The amount of your stake will be determined by whether your account denomination matches the base or quote currency.

If the denomination of your account is equal to the counter currency...

Ned, a newbie trader, has just placed USD 5,000 into his trading account and is ready to get back into the game. Let's imagine he now trades EUR/USD with a swing trading strategy, risking roughly 200 pips per trade.

Since blowing out his primary account, he has vowed to never risk more than 1 percent of his account on a single transaction.

Let's see how big of a position he needs to keep within his risk tolerance.

We can determine the dollar amount risked using his account balance and the percentage amount he wishes to risk.

USD 5,000 multiplied by 1 percent (or 0.01) equals USD 50.

The value per pip is calculated by dividing the amount risked by the stop.

USD 0.25/pip = (USD 50)/(200 pips)

Finally, we divide the value per pip by a known EUR/USD unit/pip value ratio. Each pip move is worth USD 1 in this scenario, with 10k units (or one mini lot).

[(10k EUR/USD units)/(USD 1 per pip)] USD 0.25 per pip = 2,500 EUR/USD units

To maintain inside his risk tolerance zone with his present trading setting, Newbie Ned should put on 2,500 units of EUR/USD or less. Otherwise, he'd be reverting to his old gambling habits.

Isn't it simple？

But what if you have the same account currency as the base currency？

If the denomination of your account is the same as the base currency...

Let's pretend Ned has arrived in the eurozone and has decided to trade forex with a local broker, depositing EUR 5,000.

What would his position size be if he only risked 1 percent of his account on the similar transaction as previously (trading EUR/USD with a 200 pip stop)？

EUR 5,000 multiplied by 1 percent (or 0.01) equals EUR 50.

Because the value of a currency pair is calculated by the counter currency, we must now convert this to USD. Assume that the current exchange rate for one euro is $1.5000 (EUR/USD = 1.5000).

To calculate the value in United States dollar just reverse the current EUR/USD conversion rate and multiply by the amount of euros we want to risk.

(1.5000 USD/1.00000 EUR) * EUR 50 = USD 75.00 approx.

Divide your risk in USD by your stop loss in pips as follows:

(USD 75.00) / (200 pips) Equals $0.375 per pip.

This offers Ned the “value per pip” move, which he may use with a 200 pip stop to keep inside his risk tolerance.

Finally, take the value per pip move and multiply it by the known unit-to-pip value ratio:

[(10k units of EUR/USD)/(USD1 per pip)] * (USD 0.375 per pip) = 3,750 EUR/USD units

Ned's position size on EUR/USD must be no more than 3,750 units to risk EUR 50 or less on a 200 pip stop.

Isn't it still pretty straightforward？

Now things start to get a little more complex.

But don't be concerned. We've got you back, and we'll go over everything with you so it'll be very simple.