Part II. Position Size Calculation

Position Size Calculation - Forex School

Commander in Pips: I’ve decided to make a small add-on to the money management chapter and still discuss the framework of position size calculation due risk provision. I remember that you’ve solved tasks about profit/loss and margin very well, so probably you can do this by yourself easily. I hope you don’t mind if I show you some examples. In fact, we have just one additional parameter – risk value in a single trade. All other calculations remain the same.

I’ve decided to do a demonstration of why you need to calculate a safe amount to trade. Call out an entire platoon and load them all into one van.

Why you need to calculate a safe amount to trade - Forex School

Pipruit: You’re right. Too many troops in too little space, and we could be missing a whole platoon in the next battle if one van has a flat tire. Some guidance initially doesn’t hurt.

Commander in Pips: Very well, then let’s start with it. Do you remember what parameters we’ve used when we calculate profit/loss, margins and so on?

Pipruit: I do, they are:

- Currency pair that we trade;

- Currency of our account;

- Cross rates if we need to convert results into some other currency – neither counter nor base currency.

Commander in Pips: Absolutely correct. Since we want to calculate not just the financial result but also the limit of potential loss in each trade and lot size, additionally we will need:

- Total assets value on account;

- Maximum acceptable loss value in percents in each trade;

- Stop-loss value in pips.

Let’s say that our assets value is 10,000 USD, our maximum loss in every trade is 1.5% of total assets and our average stop-loss order is 280 pips as we’ve said based on daily volatility. Later you will be able to use any parameters – the overall framework will be the same. So, here is the first task:

TASK#1 is simplest 1. Let’s suppose that your account denominated in the counter currency of the pair that you intend to trade, say, EUR/USD. Estimate dollar maximum risk value and lot size.

Pipruit: Ok, that doesn't looks too hard:

1. Our money amount of risk in each trade is equal to 10,000*1.5% = 150 USD.

2. Based on stop-loss order in pips, our lot should be equal to: 150/0.028= 5357.14 USD or ~0.05 standard lot.

Commander in Pips: Yes, that’s it.

Commander in Pips:Let’s make the task a bit harder. What if your account currency is the same as base currency? Relatively to our example, what if your account was EUR denominated?

TASK#2. Let’s suppose that your account denominated in the base currency of the pair that you intend to trade, say, EUR/USD. Estimate the dollar maximum risk value and lot size.

Pipruit: Well, then my risk will be 150 EUR instead of USD and depending on EUR/USD rate I might have either greater lot (if EUR/USD>1 or smaller one, if EUR/USD <1). By the way, what is the EUR/USD rate?

Commander in Pips: Let’s say the EUR/USD = 1.3480 when you are planning your trade.

Pipruit: Ok, then:

1. Our money amount of risk in each trade is equal to 10,000EUR *1.5% = 150 EUR.

2. Or 150EUR x 1.3480 ~ 202 in counter currency (USD)

3. Based on stop-loss order in pips, our lot should be equal to: 202/0.028= 7214.28 USD or ~0.07 standard lot.

Commander in Pips: Excellent!

Commander in Pips: So, let’s pass to the task where we might have to use cross-currency rates…

TASK#3. Your account denominated in EUR, but you intend to trade USD/CHF. All other parameters are the same. Assume that the current EUR/USD rate is 1.3480 and the current USD/CHF is 0.9165

Pipruit: Since our fiscal result will be formed in CHF, we need to somehow express our limit loss in CHF…

1. Our money amount of risk in each trade is equal to 10,000EUR *1.5% = 150 EUR.

2. Now we need to calculate the EUR/CHF rate = 1.3480/0.9165 = 1.2354

3. Hence, my maximum loss in CHF will be: 150EUR x 1.2354 ~ 185 CHF (counter currency)

4. Based on stop-loss order in pips, our lot should be equal to: 185/0.028= 6607.14

Commander in Pips: Well done!

Commander in Pips: And finally is the task with the JPY. Although this is almost the same as task#2, but many people have problems with JPY, since the is quoted for 100Y but not for 1 Y.

TASK#4. Your account denominated in CHF, but you intend to trade CHF/JPY. All other parameters are the same. Current CHF/JPY rate is 85.05.

Pipruit: Hm, let’s see:

1. Our money amount of risk in each trade is equal to 10,000 CHF *1.5% = 150 CHF.

2. Or 150 CHF x 85.05 ~ 12,758 Y in counter currency (Yen)

3. Based on stop-loss order in pips, our lot should be equal to: 12,758/(0.028*100) = 4556.43 JPY

Commander in Pips: Nice job, you have done well. So, this part now is also familiar to you.

Part II. Position Size Calculation

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