Factors required to calculate the right position Size

A trading capital / Account size.

Knowing your account balance helps you to calculate the correct amount you want to risk per trade in currency.

Assuming you have opened an account with $1000. Your account balance should reflect $1000.

Your account capital can be in any currency denomination you would prefer to hold as a person. It can GBP, NZD, CHF, CYN, JPY, EUR, RAND or USD any of your choice.

Percentage risk per trade

The percentage risk per trade is the amount of money expressed in percentage that you are willing to risk from your account for each trade you take.

This is the most important step for determining forex position size. Set a percentage amount of your account you’re willing to risk on each trade.

 Most professional traders choose to risk 1 to 2% or less of their total capital account on each trade.

Risking as less as 1% or below keeps your losses small even if you incur several consecutive losses. At the same time it protects your account from being exposed to too much risk incase of big volatile movements in the market.

For example, if you have a $1000 trading account, you could risk $10 per trade if you risk 1% of your account on the trade. If your risk less than 1% let’s say  0.5% , then you can risk $5. Just risk a percentage you are confortable with.

 If you decide to be risking 2% from your account for every trade you take, then you are risking ($1000×2%) =$20 per trade.

This means for every trade you take, you will only lose not more than $20 incase your stop loss is hit.

Choose how much you’re willing to risk on every trade, and keep it consistent. If you choose 1% as your account risk per trade, then you should risk only 1% on every trade.

 Stop loss in pips

The stop loss in pips is the distance between your entry level point and the stop loss level point.

The stop loss closes out the trade automatically incase you were wrong about the direction of the market and this helps you to limit big losses from your account.

 Stop loss levels may vary with different traders and on different trades due to different trading stategies and market volatility. 

Before entering any trade, consider both your entry point and your stop loss location. Establish where the stop loss will be for a particular trade to be taken; measure the distance in pips between your stop loss and your entry price. This will be the number of pips you have at risk for that trade.

If your entry point for a buy on the EURUSD pair is at 1.22938 and you place your stop loss below entry at 1.22550, then your stop loss in pip should be the difference between entry level and stop loss level.

That is; (1.22938 – 1.22550) = 38.8 pips.

This means your trade has to move 38.8 pips against you to be considered a failed trade.

Your stop loss should not be too close  that the trade is stopped out before the move you’re expecting occurs or too wide to generate a big loss incase you are wrong about the market. 

Once you know how far away your entry point is from your stop loss, in pips, you can calculate your position size for that trade.

 The value per pip.

Here you need to first identify the currency in which your account is in, the currency pair you are trading and the number of units traded/lot size. We calculate the pip value basing on the quote currency in the currency pair.

How to calculate position size.

Position size = (Account size ×% risk per trade)/ (stop loss in pips × pip value)

What you should know is that position size varies with different lot sizes or account type. The size on a standard account cannot be the same as that of a mini account nor that of a micro account.

We shall use different examples to illustrate the different ways of how you can calculate your position size.

What you should note first is that for all pairs where the USD is a quote/counter currency in the pair, for example the EUR/USD, pip value is the same as indicated;

1000 lot (micro) is worth $0.1 per pip movement, a 10,000 lot (mini) is worth $1, and a 100,000 lot (standard) is worth $10 per pip movement.

If the USD is not the quote currency then these pip values will vary slightly. Learn more.

Let’s now look at some examples on how to calculate position size;

1. When your account capital is not in USD; in EUR

Let’s say €1000 acc balance and you are trading a GBP/USD going long, risking 2% per trade and your stop loss is 150 pips ..

So you need to convert the amount risked per trade from Euros to US dollar first.

Risk per trade = (1000× 0.02) = €20

Since we need to convert Euros to US dollars, we must know the exchange rate on the EURUSD.

If the exchange rate is 1.18974.

I.e: USD 1 = EURO 1.18974

FOR €20, (20/1.18974) =$ 16.8

Therefore the risk per trade in USD = $16.8

Position size = Amount risked per trade/( stop loss in pips x pip value)

If it was a Standard account;

Remember, for a standard account (100,000) 1 pip = $10, for all pairs where the USD is a quoted

Substituting into our formula:

= $16.8/(150 x $10)

Position size = 0.01

If it was a mini, 10000 units = $1,

=$16.8/(150 x$ 1)

Position size = 0.11

And if it was a micro, 1000 units  = $0.1,

=$16.8/(150 x $0.1)

Position size = 1.12

NOTE: The numerator and the denominator should be of the same currency.

2. Suppose the conversion currency was the base currency in the pair.

For instance trading USD/CHF with our €1000 account using 2% risk with 150 stop loss pips

First we must Convert the EURO to CHF first to get the value of €20 in CHF,

If the exchange rate of EUR/CHF is 1.4500.

Risk per trade = (20x1.4500) =CHF 29

Position size = Amount risked per trade/( stop loss in pips x pip value)

If it was a Standard account;

Remember, for a standard account (100,000) 1 pip = $10, for all pairs where the USD is a quoted

Substituting into our formula:

= 29/(150 x10)

Position size = 0.019

If it was a mini, 10000 units = $1,

=29/(150 x1)

Position size = 0.19

And if it was a micro, 1000 units  = $0.1,

=29/(150 x 0.1)

Position size = 1.93

3. When your account capital is in USD

For instance if the account balance in $10000 and you are risking 2% each trade using a stop loss of 200 pips on EURUSD, your position size would be;

First determine the value of risk amount per trade = (2% ×10000) =$200

Since the quote currency is the same as the account denomination, you don’t have to convert the risked amount, so you just substitute in our formula.

Position size = Amount risked per trade/( stop loss in pips x pip value)

If it was a Standard account;

Remember, for a standard account (100,000) 1 pip = $10, for all pairs where the USD is a quoted

Substituting into our formula:

= $200/(200 x $10)

Position size = 0.1

If it was a mini, 10000 units = $1,

=$200/(200 x$ 1)

Position size = 1.0

And if it was a micro, 1000 units  = $0.1,

=$200/(200 x $0.1)

Position size = 10.0

I will insist, don’t make things hard for you to trade.

All you need  to know is how much you are willing  to risk for each trade you take, your stop loss in pips and depending on the account size, the average lot value per pip.

You can then easily calculate the proper position size to use on any trade!

 

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