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Working Out Position Size in Forex Trading

I got this (slightly edited) private message inquiry from a Trade2Win member yesterday. It gives me a chance to reiterate something which has new forex traders minds spinning regularly for nothing.

… wondered if you could assist me in working out my position sizing for different currency pairs? Be great if you could as im a bit stumped…

Say i have an account of £10,000

I want to risk 1% which = £100

I’d like to buy usd/chf @ 10500, with a stop of 20 pips @ 10480.

How do i go about working this out if i have leverage of 100:1?

Dealing with USD/CHF pip values isn’t quite as clean and easy as dealing with those of EUR/USD where they are fixed (in dollar terms), but it certainly can be done. The math isn’t all that hard.

To get the pip value for a pair where the USD is the base currency (quoted first) you are effictively determining what a pip represents in % terms relative to the market price. In this case we’re looking at USD/CHF with a starting value of 1.05, thus

Pip % value = .0001/1.05 = 0.00952%

So if we’re trading a full standard lot ($100,000) then the pip value will be $9.52, which is $100,000 x 0.0000952.

Now the question is how to determine position size based on a 20 pip stop loss for a given risk exposure. The first step there is to figure out the 20 pip % value. That’s 0.0020/1.05, or 0.19048%. From there you have to do some algebra to figure out the size of the position based on how much you are risking. You’re using this base formula.

R = PPV x S

Where R is risk amount in $, PPV is the pip % value for the number of pips you’re risking, and S is the position size in $. Flipping that around to solve for S you get:

S = R/PPV

Using our example, we have a £100 risk. If the GBP/USD exchange rate is 1.50, that’s a $150 value for R. Plugging in that into the formula above and we get:

S = $150/0.19048 = $78,750

Rounding down that gives us either 78 micro lots or 7 mini lots.

We can put all of the above into one formula.

S = R/(Pf/Pr)

Where Pf is the pip fraction (decimal difference between entry and exit) and Pr is the current market rate for the pair in question. Using our example numbers we have:

S = £100/(.0020/1.0500)

Using the GBP/USD value of 1.5 that becomes

S = $150/(.0020/1.0500) = $78,750

Now here’s where the 100: 1 leverage question comes in. Ready? It’s very simple. You just have to ask this question:

Based on my permissible leverage, can I take a position this size?

In this example where a £10,000 account is being used, so long as a major chunk of those funds aren’t already being used for margin on other positions, the answer is yes.

To put it another way, the leverage question plays absolutely no part in determining the size of the position you take when you are working out that size from how much risk you want to take other than to set the upper end limit of how big that could be.

By John

Author of The Essentials of Trading