Position sizes are highly relevant to leverages. Position sizing is choosing precise units to buy or sell a currency pair. Selecting a position may be easy or hard, depending on the trader and some factors. When we say factors, these include the currency pair the trader chose and the account denomination since some come in USD, EUR, GBP, etc. Due to these factors, the calculation process may vary. Let us enumerate things that are important when calculating the position size:
- Account balance or equity
- The chosen currency pair
- Stop-loss in terms of pips
- Account balance percentage that you are willing to risk in the trade
- Exchange rates when converting currencies
How to calculate positions
A beginning trader’s common mistake is choosing huge positions that he cannot handle yet. It leads to hefty losses. So, before going live in forex and start trading, let alone trading massive positions, you must know the what’s going on in a forex market. Thanks to the internet, it’s not that hard to self-study or find mentors or classes that may help.
Contributing factors in the calculation
People have different trading accounts. Some have more money, and some have tighter budgets. Also, accounts come in various denominations. Is it the same with your quote currency or your base currency? Let us add to the list of things that impact the position size you choose from: the risk you are willing to take.
Let us cite an example.
Imagine this: you have $5k in your account balance, and you want to trade EUR/ USD in a swing trade. Your account has the same denomination as the counter currency. As a beginner, you are afraid to risk more than 1% of your account in a single trade. So, you decide to risk only around 200 pips in every trade. Let us calculate step by step:
- $5k account balance * 1% risk percentage amount = $50 amount risked
- ($50 amount risked)/ (200 pips stop) = $0.25 value per pip
You are trading a mini lot of 10k units, and each pip move is equal to $1.
- $0.25 per pip * [(10k units of EUR/ USD)/ ($1 per pip)] = 2,500 EUR/ USD units.
Your trade setup suggests that you only take no more than 2,500 EUR/USD units.
If all the factors are the same but the account denomination is not the same as the counter currency, but the base currency, here is the calculation:
- €5k * account balance 1% risk percentage amount = €50
Since the account denomination is not the same counter currency, we have to convert €50 to USD. Let’s assume that €1= $1.5
- ($1.5/ €1)* €50 = more or less $75
Now, let’s divide that risk in your stop loss in terms of pips.
- ($75)(200 pips) = $0.375 pip move
Now, you know the value per pip move with a 200 pip stop which satisfies the risk level that you can accept. For the final step, multiply the value per pip move and the known unit to pip value ratio.
- ($0.375 per pip)[(10kunits of EUR/USD)/($1 per pip)] =9750 EUR/USD units
Your trading setup suggests that your position size should only be 3750 EUR/USD units or less if you are comfortable risking €50 or less with a 200 pip stop on a EUR/USD currency pair.
Is it confusing?
If it still sounds more confusing to you, you need to start practicing more. As we’ve said: position sizing is one of the most important, if not the most important, skill a trader should have.