Reading time: 9 minutes
Learning to calculate one’s position size as a Forex trader is crucial and keeps risk measured and controlled. It determines how much of your account equity you are willing to risk on each trade. The correct position size depends on several factors, including the account balance, account currency, risk tolerance, protective stop-loss distance and currency pair.
For those new to the Forex market, you must be aware of some of the basics to calculate the correct position size:
The foreign exchange market is structured through currency pairs. That is, two countries' currencies paired together, hence the term currency pairs.
This is the first listed currency in a currency pair and always represents one unit.
This is the second listed currency and determines the value of the base currency in terms of the quote currency. This is why you may have also heard the quote currency referred to as the term currency.
A pip represents the unit of change for a currency pair. It is an abbreviation for Percentage in Point and is essentially 1/100th of 1%. The majority of major currency pairs are quoted to the 4th or 5th decimal place (0.0001), while some currencies, like the Japanese yen (JPY), are often quoted to either the 2nd or 3rd decimal place (0.01).
The total amount of money in your trading account.
The maximum percentage of your account balance you are willing to risk on a single trade.
The number of pips that your trade will be liquidated at if the position moves unfavourably.
Lots in the Forex market determine the transaction amount.
Standard Lot: 100,000 units of the base currency.
Mini Lot: 10,000 units of the base currency.
Micro Lot: 1,000 units of the base currency.
*Note that the currency pair’s exchange rate in the following examples are fictional.
Risk / Protective Stop-Loss Distance in Pips
When trading with an account currency that matches the QUOTE currency of the currency pair traded, the position size calculation is straightforward.
You would first need to determine your risk per trade based on how much you want to risk in the position. Let’s keep it simple and say you are trading the EUR/USD with an account denominated in US dollars (10,000 USD) and are willing to risk 2%, that’s 200 USD. The final part of the calculation involves identifying how many pips your protective stop-loss order is from the entry value. In this example, this is 20 pips, or 0.0020. So, to calculate the position size here, divide 200 by 0.0020 to produce 100,000 units.
With MetaTrader, you would divide the units by 100,000 to get the value of 1.00 (that is one standard lot). Therefore, to keep your risk limited to 200 USD, input 1.00 in the trade volume in either MetaTrader 4 (MT4) or MetaTrader 5 (MT5).
(FP Markets MetaTrader 4)
(Risk * Exchange Rate) / Protective Stop-Loss Distance in Pips
As evident from the formula, if your account currency is the same as the BASE currency of the currency pair traded, there is another component to the calculation to consider: the exchange rate of the currency pair you wish to trade, as you must convert your account currency risk into the quote currency value of the pair traded.
For example, imagine you have a 10,000 GBP account (British pounds) and are willing to risk 200 GBP to trade the GBP/USD exchange rate at $1.2502; the protective stop-loss distance is 50 pips, or 0.0050. You multiply 200 by $1.2502 to equal 250.04, which is 200 GBP risk in USD. Now, simply divide that value by the stop-loss distance in pips as in the first example to produce the position size: 250.04 / 0.0050 to equal 50,008. Divided by 100,000, this would give you a volume of 0.50 to input in your MT4 or MT5 trading terminal.
(FP Markets MetaTrader 4)
This calculation here will depend on the conversion currency pair.
Let’s start with an account currency that is the same as the CONVERSION currency pair’s QUOTE currency. The account currency is in USD, and the currency pair traded is EUR/GBP. Imagine an account size of 5,000 USD, and you risk 2%, so 100 USD, with a stop-loss distance of 20 pips.
In order to calculate the position size here, you must determine how much your USD risk is in GBP (the quote currency of the pair traded). To do this, you would need the conversion currency pair: GBP/USD at $1.2153, which, when inverted (1/1.2153 = GBP 0.8228), would allow you to calculate GBP risk. So, 100 USD * 0.8228 = 82.28 GBP. Knowing that is the GBP risk, divide this value by the stop-loss distance in pips (0.0020) to deliver a position size of 41,140 units, or 0.41 (rounded) in MT4/5.
(FP Markets MetaTrader 4)
Finally, let’s look at an account currency that is the same as the CONVERSION currency pair’s BASE currency.
Assume you have an account denominated in Swiss franc (CHF), with an account balance of CHF 100,000. You are also willing to risk 1% of the account per trade, and the trade of interest currently requires a protective stop-loss distance of 60 pips on the USD/JPY currency pair.
To convert CHF risk to JPY risk, you must multiply 1,000 CHF by the CHF/JPY exchange rate (JPY 162.62) to produce JPY 162,620 risk. This is your CHF risk in JPY: the quote currency of the currency pair traded. Then divide this value by 0.60 pips (remember, with JPY pairs, they are quoted to the 2nd or 3rd decimal place) to get 271,033.333 units, and when divided by 100,000, the input volume for MT4/5 would be 2.71 to maintain risk to 1,000 CHF.
(FP Markets MetaTrader 4)
Calculating position size is an important part of risk management in Forex trading. By following the calculation methods above, you will always be able to calculate the correct position size. While it is important to understand the manual calculation, you can use the FP Markets Forex Calculator. This not only allows traders and investors to calculate their position size, but it can also help calculate pip values, profit and loss, margin and swap fees.
من خلال تقديم بريدك الإلكتروني ، فإنك توافق على سياسة خصوصية FP Markets وعلى تلقي مواد تسويقية مستقبلية من FP Markets. يمكنك إلغاء الاشتراك في أي وقت.
Source - cache | Page ID - 36165
