Calculating pip value
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  1. #1
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    Default Calculating pip value

    Hi.

    Can anyone tell me if there is a way I can reverse calculate pip value?
    So, if I wanted to make my pip value £10 per pip and I was running 5% risk, how would I calculate how many lots I would need to purchase, how much leverage/capital I would require?

    Many thanks,
    Amir Maiara
    Last edited by Pipllionaire; 04-19-2017 at 06:33 PM. Reason: Update

  2. #2
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    Default money management.

    Quote Originally Posted by Pipllionaire
    Hi.

    Can anyone tell me how much capital I would need to trade at £10 per pip within the rules of responsible trading?
    Many thanks.
    hello,
    i am glade you asked.
    the rules are very clear when it comes to money management, the number 1 is never risk more than 1% of your account.
    i see that you want to to open a position size that is $10/pip, which is in my opinion very risky. why!
    lets do some math first.
    $10/pip is a position size of "1.00" if you using MT4 in other platform you may find this configuration "100000 unites".
    This mean if the maket goes against you only 10 pips you will be down $100 and for a new trader that a lot of many.
    Before opening any trade you have to ask 3 queastions:
    1-how much money i am ready to risk?
    the amount should be always 1% of you capital.
    lets say that you capital is $1000.
    So 1% is $10.
    2-how many pip i am ready tp risk?
    here come the problem for lot of people, the number of pips is given by the strategy you are using and never fixed to 100 pips or 50 pips thats a mastike, the only one thing that give the risk in pips is the strategy, if you dont have a strategy Stop trading, learn a strategy there are a lot of them out there.
    now lets say that your stregy is given a SL of 60 pips.
    3-what is the lot size or position size?
    well this is what you give first in your question
    in defenition how much many per pip $/pip.
    to get that we will devide the money that you are confortable to risk as we mentionned earlier $10 on the number of pip risked which is 60.
    you do the math ===> $/pip=10/60=0.16 $/pip.
    the position size on MT4 would be 0.01 or 0.02 since 0.16 is close to 0.2.
    in other platform configuration the position size would be 1000 units or 2000 unites very exactly if your broker does allow it 1600 unites.
    This is the process that you should use all the time before any trade.
    i dont know how many pips you are ready to risk thats why i cant tell you what to do.
    if i know how many pips you will risk i will know how much is you capital if we apply the rule of 1% of your capital.
    i hope this help you.
    Last edited by Pipzilla; 04-19-2017 at 08:41 PM. Reason: Solicitation

  3. #3
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    Quote Originally Posted by Pipllionaire View Post
    Hi.

    Can anyone tell me if there is a way I can reverse calculate pip value?
    So, if I wanted to make my pip value £10 per pip and I was running 5% risk, how would I calculate how many lots I would need to purchase, how much leverage/capital I would require?

    Many thanks,
    Amir Maiara
    What's your average or expected stop loss in pips per trade. With this info we can give you a straight simple answer.

  4. #4
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    Quote Originally Posted by thefxtradingtoolz View Post
    i see that you want to to open a position size that is $10/pip
    Actually, the question asked £10 per pip, which is around $7.80 at current rate.

  5. #5
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    this is a question to Jezzode...
    I agree with everything you said. So far I have been questioning which way to go ....let me explain, be with
    me and see if I can explain this 2 scenarios properly:

    Firstly, I agree with a 1% risk per trade (I however, go up to 2% per trade only because I only trade ONE currency so I only have ONE open risk at any given time and I do not enter a Second trade unless the first is at least on B/E, either way, I do agree with 1% though, I would drop down to 1% as my bank grows)

    I have been using Scenario 1 so far but wonder if Scenario 2 is the best way?

    Scenario 1: A fix $ amount to risk
    In this scenario (which I have been using) I have more control on my risk in $$. I set a fix 1% which equates to $100 and I vary my "units" traded based on my pips risk
    Units = $$ risk / #pips risk

    In this case, if a trade "cost me 30pips" and buy more units than if it cost me say 50 pips
    Based on my history of 200 + trades this scenario has proven slightly more profitable than scenario 2 but I wonder if this is the correct way?

    Vary the units to invest a fix $$ risk v vary the $$ risk to keep a fix units traded?
    In this scenario the value per pip vary (negative)
    The positive is that I buy more units for "cheaper trades in pips" which are easier to hit the 2:1 target

    Trade 1: 30 pips target 60 pips
    Trade 2: 50 pips target 100 pips


    Scenario 2: A fix lot size (fix units)
    Say my 1% is equal to $100 able to risk per trade
    My stop varies between as little as 10 pips up to a max of 50 pips. However my average is 40pips

    If I use a fix units, the trading is much easier i.e.. If I settle for say $20,000 units fix. Then the value of each pip will be 20 x $0.12 = $2.40 per pip
    So if I have
    Trade1 of 30pips = $72 risk
    Trade2 of 50pips = $120 risk
    my risk will vary according to my risk in pips, and if I go for a 2:1 reward (as it is my case) then in some instances I only will be making $144 and in others $240 but I will also be losing more in some trades and winning more in others. And also, the ones I will be winning less are the ones that by logic easier to reach because I will need say 60 pips move only to hit my profits whilst I will need 100 pips move to hit my trade2 profits otherwise I lose "more" $120 v $72

    In my most recent 3 trades I made 16 pips net but I lost $20 because I used scenario 1


    What do you think? which way is best? Numbers tells me is best in scenario 1 which controls my risk in $$ to a fix 1% amount however scenario 2 will "average itself out"..
    I was never taught which way is the right way?

    Quote Originally Posted by Jezzode View Post
    What's your average or expected stop loss in pips per trade. With this info we can give you a straight simple answer.

  6. #6
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    I understand what you are saying, and the thought process behind why you perhaps have this question. Although, one of the scenarios that you mentioned above is fundamentally flawed, whilst the other is what experienced traders and textbooks advocate as the correct way to manage risk.

    First of all, and as you have mentioned, there typically is never a fixed stop loss [in pips] that will be applied to each and every trade. This is because all trades are different, and depending on the market at the time of the trade you may feel that a larger or smaller stop loss is required so that you fit into the Price Action which is taking place.

    I would most certainly take the approach that irrespective of the size of the stop loss [in pips], you still risk the same amount in total over the trade in question.

    Applying this to your original question

    Quote Originally Posted by Pipllionaire View Post
    if I wanted to make my pip value £10 per pip and I was running 5% risk, how would I calculate how many lots I would need to purchase
    Example 1: Stop loss 50pips. 50 x £10 per pip = £500 total risk on trade.
    £500 has to equal 5% risk of account, therefore your account balance has to be £10,000

    Example 2: Stop loss 30pips. 30 x £10 per pip = £300 total risk per trade.
    £300 has to equal 5% risk of account, therefore your account balance must be £6,000

    This is a backwards approach, you should be looking at your available account balance, deciding how much you want to risk as a total percentage and then dividing this over the pips that you require to place a suitable stop loss. This way you are always risking the same % of your account, regardless of the trade in question. This makes managing the trade, and more importantly your exposed risk more linear.

    Example 3: Your account balance: £5,000
    Agreed % to risk on trade: 5%
    Agreed stop loss size [in pips]: 50
    What should your position size be?

    Answer: (Total Account Balance x Agreed % to risk on Trade) / Agreed Stop Loss [in pips]
    Workings: (£5,000 x 5%) / 50 = £5 per pip.

    By using this approach, no matter how big or how small your Stop Loss you will always be risking the same % of your account on each trade, which in the above example is £250. I'd certainly be able to sleep better at night knowing that I have this level of consistency, and control.

    All of the above is in GBP [£], if your are trading an instrument that does not have a base P&L in GBP then you will need to convert at the appropriate exchange rate. However, what's important here is that already you know what your total risk will be on the trade, regardless of what it is that you are trading.

    Quote Originally Posted by fxpirana View Post
    Scenario 1: A fix $ amount to risk
    In this scenario (which I have been using) I have more control on my risk in $$. I set a fix 1% which equates to $100 and I vary my "units" traded based on my pips risk
    Units = $$ risk / #pips risk
    As explained, this is the correct way - Scenario 1.
    Last edited by Jezzode; 04-20-2017 at 03:57 AM.

  7. #7
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    Quote Originally Posted by Pipllionaire View Post

    Can anyone tell me if there is a way I can reverse calculate pip value?
    So, if I wanted to make my pip value £10 per pip and I was running 5% risk, how would I calculate how many lots I would need to purchase, how much leverage/capital I would require?

    Hello Amir,

    I'm not sure you really want to trade in the way you described in your question. But, I will answer your question anyway.

    Yes, it is possible to "reverse calculate pip-value", as you call it. But, the calculations are a nuisance, and I think you will find that they slow down your trading, and burden you with a lot of unnecessary math.

    Anyway, here goes:



    Calculating position size --- given the stipulations in your question

    • Once you specify £10 per pip, then you have already determined your position size (number of lots).

    Your 5% risk factor does not enter into this part of the calculation.


    Examples:

    (1) If you are trading EUR/GBP,

    then, £10 per pip implies a position size of 100000 units (1 standard lot) = 100 micro-lots


    (2) If you are trading GBP/USD, and the current price of GBP/USD = 1.2805,

    then, £10 per pip implies that your position size would be:

    100000 units x GBP/USD = 100000 x 1.2805 = 128050 units = 128 micro-lots (rounded)


    (3) If you are trading USD/JPY, and the current price of GBP/JPY = 139.46,

    then, £10 per pip implies that your position size would be:

    100000 units x GBP/JPY ÷ 100 = 100000 x 139.46 ÷ 100 = 139460 units = 139 micro-lots (rounded)


    (4) If you are trading EUR/CAD, and the current price of GBP/CAD = 1.7264,

    then, £10 per pip implies that your position size would be:

    100000 units x GBP/CAD = 100000 x 1.7264 = 172640 units = 172 micro-lots (rounded down)


    .......and so forth.


    You can verify the results in these examples, using the Babypips Pip Value Calculator



    Calculating required capital

    • In order to determine your required account size (capital), you must factor in your risk percentage (5%) and your stop-loss (let's assume 35 pips, in order to complete the calculation).

    In each example above, a 35-pip loss @ £10 per pip would result in a 5% loss of capital. Therefore, in each example above, the same initial capital would be required, calculated as follows:

    Required capital x 5% = £10 per pip x 35 pips

    Required capital = £10 x 35 ÷ 0.05 = £7000 for each trade, regardless of the currency pair traded



    Calculating actual leverage being used

    • The actual leverage used in each of the trades in the examples above can now be calculated.

    The calculations will take this form: Actual leverage used = notional value of each trade in GBP ÷ £7000


    For the EUR/GBP trade in example (1) above, if EUR/GBP = 0.8366 (current price),

    then, actual leverage used = 100000 EUR x EUR/GBP ÷ £7000 = 100000 x 0.8366 ÷ 7000 = 11.95:1


    For the GBP/USD trade in example (2) above, 128050 GBP of GBP/USD has a notional value of £128050,

    then, actual leverage used = £128050 ÷ £7000 = 18.29:1


    For the USD/JPY trade in example (3) above, if GBP/USD = 1.2805 (current price),

    then, actual leverage used = 139460 USD ÷ GBP/USD ÷ £7000 = 139460 ÷ 1.2805 ÷ 7000 = 15.56:1


    For the EUR/CAD trade in example (4) above, if EUR/GBP = 0.8366 (current price),

    then, actual leverage used = 172640 EUR x EUR/GBP ÷ £7000 = 172640 x 0.8366 ÷ 7000 = 20.63:1


    Regarding actual leverage used: If you are content with the risk (5%) that you are taking, then the actual leverage used in your trades does not matter, provided your broker offers you significantly more maximum allowable leverage than you are actually using.

    In other words, if your trades actually use 20:1 leverage, your account must allow you that much leverage PLUS enough additional leverage to absorb losses down to the lever of your stop-loss.

    Be aware that maximum allowable leverage at most brokers is not the same for all currency pairs. Exotic pairs typically carry lower leverage than major pairs. Also, in strenuous market conditions, leverage can be temporarily reduced for all currency pairs.

    .
    Last edited by Clint; 04-20-2017 at 04:21 AM.

  8. #8
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    dear jezz, this is precisely what I have been doing and you just gave me a confirmation. It has been in back of my mind for ever, but luckily I didn't. So thank you very much.
    I will now continue without this question bothering me on the fix $$$ amount which makes total sense to me.
    I like "knowing exactly how much my risk is in dollar amount" from my bank account. I am a pro punter, and this is exactly what I have always done, the difference however, is that in punting there is only your bank (Say $10K) and you decide what % to risk according to your edge (say 2%) and your probable losing strikes/sequences.
    But in forex we have a third variable and that is the stop size in pips that varies as you mentioned

    So once more, thank you a lot.
    Kind regards
    Fxpirana

  9. #9
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    Quote Originally Posted by Pipllionaire View Post
    Hi.

    Can anyone tell me if there is a way I can reverse calculate pip value?
    So, if I wanted to make my pip value £10 per pip and I was running 5% risk, how would I calculate how many lots I would need to purchase, how much leverage/capital I would require?

    Many thanks,
    Amir Maiara


    most brokers would require the order to be split in 2 using a "standard account"

    order 1- 1 lot
    order 2- 0.03 lots

    approximately 10 GBP per pip

    assuming you have a minimum standard opening account of 10k GBP,
    5%=500 GBP giving 50pips

    while there is a lot written about never use more than 2% of capital only use 1%.so on and so forth. that is not the case of real world usage. That dosnt mean that the above isn't wise, its just not accurate.

    amount risked is dependant on your trading method and how many pairs you cover and how many you have open at one time, also how you have set your compounding and the time frame you execute trades to completion.
    Last edited by scmonds; 04-21-2017 at 01:52 AM.

  10. #10
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    Thank you.
    This is a simple format for me to understand.
    I am working my way through the babypips school and am possibly getting ahead of myself I must admit.
    Now I see I have been taking a slightly 'backward' approach in my thinking. I wanted to gauge how much I would need to trade at £10 per pip and now I understand that there are many variables to this question.
    However, it seems that 10k is probably in the right ball park, and compounding will no doubt ease the risk %.
    I will re-read your reply until it fully sinks in! Many thanks!

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