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Position Sizing Details Overview and How to Calculate Position Sizes

Position Sizing Details Overview and How to Calculate Position Sizes

Position Sizing Details Overview and How to Calculate Position SizesSince we have learned about the drawbacks of trading with leverage, let’s now try to determine how to use the leverage using proper position sizing. Being able to determine the correct position sizing is one of the most important and helpful skills in a trader’s skill set. Traders are risk managers and before you start trading real money, you should do whatever it takes to learn about the position sizing and doing its calculations right.

The good news is that being able to keep the position size within the risk comfort level is an easy task. There are only a few steps involved in the calculation of position size depending on the currency pair you are trading and you account denomination. All you need are just 5 pieces of information before you get your calculations going:

  • Equity or account balance
  • Currency pair you are trading
  • The amount or percentage of the account you are willing to risk
  • Stop loss in pips
  • Conversion currency pair exchange rates

Seems quite easy. Isn’t it? Let’s try a few examples.

Calculating Position Sizes

In order to make everything easy to understand, we will take the help of examples.

This is Rocky.

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Not long ago, when you were a complete newbie in this field, you blew away your account because of using some extraordinary positions. It was almost like he was some idiot rich from the Middle East and he traded from the hip and traded ENORMOUS.

Rocky also didn’t understand the importance of position sizing and as a result, he had to bear the aftereffects. After paying a heavy price for his actions, Rocky took classes to understand position sizing and its importance to make sure such things never happen to him again. In the following examples, we will show you how to calculate your position size based on the account size and the risk factor.

Your position size also depends on the account denomination no matter if it’s the base currency or the quote currency.

If Your Account Denomination is the same as Quote Currency

Let’s suppose you have around $5,000 in your trading account and you are all set to trade. You are using a swing trading system and you have chosen the EUR/USD currency pair. In USD 50/200 pips = USD 0.25/pip.

The last step, we multiply the value per pip by a known unit/pip value ratio of EUR/USD, which in this case is 10K units or one mini lot. Each pip costs $1. USD 0.25 per pip x [(10K units of EUR/USD) / (USD 1 per pip)] = 2,500 units of EUR/USD.

So, this means you have to put on at most 2,500 units of EUR/USD to stay within your risk comfort level with this current trade setup as discussed.

Simple, isn’t it?

But wait for a second! What if your account is the same as the quote currency?

If Your Account Denomination is the same as Base Currency

Let’s say you want to have fun with the Euros and decide to trade forex with a local broker. You deposit EUR 5000 in your account and start.

With other factors remaining the same, we are here to calculate the position size if you only risked 1% of your account.

EUR 5,000 * 1% (or 0.01) = EUR 50

Since the account is in the base currency, we shall convert this to the USD since the value is calculated in the quote currency. Suppose the current exchange rate for 1 EUR is $1.5000 (EUR/USD = 1.5000).

(USD 1.5000/EUR 1.0000) * EUR 50 = approx. USD 75.00

In the next step, divide your risk in the USD by the stop loss in pips.

(USD 75.00)/ (200 pips) = $0.375 a pip move.

This gives you the value per pip with a 200 pip stop to stay within the risk comfort level.

In the last step, multiply the value per pip move by the known unit-to-pip value ratio:

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

This means that to risk an amount of UR 50 or less on a 200 pip stop on the currency pair EUR/USD, your position size should be no bigger than 3,750 units.

It is pretty simple, no? Well, it will get complicated from here but don’t worry! We have your back and we will make everything easy to understand with our cool explanations.

How to Calculate Your Position Size in Different Forex Pairs and Account Currencies

In our previous lesson, we talked about the calculation of position sizes. What happens when the account currencies and forex pairs change? It is always a possibility. Let’s suppose that you want to buy EUR/GBP and your broker account is in the denomination of USD. You are only willing to risk $100 in this trade but the problem is, you are not trading USD but Japanese Yen and pounds. How can you calculate the position size? Don’t worry, we have you covered.

If your account denomination is the same as conversion pair’s quote currency

Let’s suppose you want to trade the above-mentioned currency pair i.e. EUR/GBP with a 200 pip stop. In order to identify the correct position size, you need to find the value of risk in pounds. Here we are discussing the value of a currency pair in the quote currency.

Step 1: Convert the Risk Amount to USD

In order to find the right position size for forex in this situation, we need the GBP/USD exchange rate. So, now you are back to trading with your US broker selling EUR/GBP and you are only willing to risk 1% of your USD 5,000 account that makes up to USD 50. To determine the correct forex position, we need the GBp/USD rate.

Step 2: Convert risk amount in USD to GBP

Since the account is in the USD, we need to invert the exchange rate to find the proper amount in the GBP. USD 50 * (GBP 1/USD 1.7500) = GBP 28.57  Now we need to go through with the rest of the examples in the same manner.

Step 3: Get GBP risk amount into Pips

Divide by the stop loss in pips:

(GBP 28.57)/(200 pips) = GBP 0.14 per pip

Step 4: Determine the Position Size

Last but not least, multiply by the already calculated unit to pip value ratio.

(GBP 0.14 per pip) * [(10k units of EUR/GBP)/(GBP 1 per pip)] = approximately 1,429 units of EUR/GBP

This means, you can sell no more than 1,429 units of EUR/GBP to stay within his calculated risk levels.

If your account denomination is in the base currency

In this very case, assume you have decided to trade USD/JPY and you have chosen 100 pips.

Step 1: Calculate the risk amount in CHF

You have decided to only risk 1% of your CHF 5000 account i.e. CHF 50.

Step 2: Convert risk amount in CHF to JPY

To begin with, we have to discover the estimation of CHF 50 in Japanese yen, and since the record is a similar denomination as the conversion pair’s base currency, we should simply increase the sum gambled by CHF/JPY swapping scale (85.00):

CHF 50 * (JPY 85.00/CHF 1) = JPY 4,250

Let us now simply complete the rest a similar path as different models.

Step 3: Convert Risk Amount in JPY to Pips

In this step, you have to divide by the stop loss in pips.

JPY 4,250/100 pips = JPY 42.50 per pip

Step 4: Calculate Risk for Position Size

Lastly, multiply by the known unit to pip value ratio:

JPY 42.50 per pip * [(100 units of USD/JPY)/(JPY 1 per pip)] = approximately 4,250 units of USD/JPY

So, here you go!

You can trade at most 4,250 units of USD/JPY to keep your loss down to CHF 50 or less.

After going through all those examples, you are all set to become a competent risk manager. You so far know that you need to set the correct position sizes to become a master at risk management. What more you can do? Stay disciplined. By keeping to your stops and pre-calculated risk comfort levels, you can be certain that future profit-making opportunities will come and you can recover well.

Position Sizing Calculator

At long last, we realize that you won’t generally have a calculator for a position sizing with you at the positioning stage, so we have chosen to take it upon ourselves and have fabricated a convenient position sizing calculator for you! This is how cool we are! You can use this forex position sizing calculator whenever you want. In fact, you should use it the first time when you decide to start trading.

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