Position sizing, units and leverage

[rhodytrader]

Originally Posted by GBLilleyUSMC

Leverage is simply the amount that you are borrowing from the broker.

While that's true in the stock market, it's not technically correct in forex or futures. You aren't putting down x% and borrowing 100%-x%. It's more like you're borrowing 100% of the short currency. But of course you're also depositing 100% of the long currency. Margin isn't a down payment in forex. It's a surety against loss.

[4xStar]

Originally Posted by sterlo

the 3% risk is just how much you are willing to lose on your trade your $300 is 3% of 10 k the leverage does not matter it is just the more you leverage the smaller the movement it takes to hit your $300 (stop loss)

This makes perfect sense to me.

1 mini lot = $10,000.00

100:1 leverage, each pip = approx $1,
price moves 300 pips, you gain or lose $300.

200:1 leverage, each pip = approx $2,
price moves 150 pips, you gain or lose $300

10:1 leverage, each pip = approx .10 cents,
price moves 3000 pips, you gain or lose $300

So the more your leverage, the smaller the price movement it takes to hit a $300 stop, as sterlo said. Right?

$300 is 3% of a 10k acct, so should be the maximum you are willing to risk on any one trade. The two variables are position size and amount of leverage. So if you want to take a trade that you will need a 350 pip stop and the smallest position you can take is 1 mini lot, you will have to reduce leverage to under 100:1 (or find another trade...)

I agree with Brian, probably best to trade micro lots to see how it plays out in real time without major losses.

[rhodytrader]

Originally Posted by 4xStar

This makes perfect sense to me.

1 mini lot = $10,000.00

100:1 leverage, each pip = approx $1,
price moves 300 pips, you gain or lose $300.

200:1 leverage, each pip = approx $2,
price moves 150 pips, you gain or lose $300

10:1 leverage, each pip = approx .10 cents,
price moves 3000 pips, you gain or lose $300

So the more your leverage, the smaller the price movement it takes to hit a $300 stop, as sterlo said. Right?

If you trade 1 mini lot as you have outlined then your pip value remains the same regardless of your leverage. The pip value on 10,000 EUR/USD is $1 regardless of whether the leverage is 10:1 or 1000:1.

The two variables are position size and amount of leverage.

No. The one and only variable in pip value is position size. Leverage only plays a part in terms of how large a position you could put on, or if you want to talk about gearing (leverage employed) then leverage is the ratio of the size of your position to the size of your account. It's just a ratio. As such, it doesn't impact pip value directly.

[greywolf238]

4X i have to disagree,
1 standard lot = $10 a pip, doesn't matter what your leverage is, if you traded 2 standard lots then it's 20 a pip 3 lots $30 a pip and so on.
My understanding is leverage only effects what your broker requires to be put on margin.

[kangi]

Rhody...

"No. The one and only variable in pip value is position size. Leverage only plays a part in terms of how large a position you could put on, or if you want to talk about gearing (leverage employed) then leverage is the ratio of the size of your position to the size of your account. It's just a ratio. As such, it doesn't impact pip value directly. - rhody"

1. "Position size is a variable to determine a pip value - rhody", ok I can agree with that.

2. "Leverage "only" plays a part in terms of how large a position you could put on.....It's just a ratio.... doesn't impact pip value - rhody" shrugs at the spiderweb

per your statemet, If A = B and C = A ....why is C and B not related?
A = position size
B= pip value
C= leverage

in my eyes C forms a direct relationship to B through A. Yes there is B without C when doing a 1:1 but when you have C at your disposal Your A you can control changes, which changes the B... its related

if your only point is this "The pip value on 10,000 EUR/USD is $1 regardless of whether the leverage is 10:1 or 1000:1 -rhody" man that is weak to even skip that stone across the lake, dont you agree? of course a pip value is always set to a certain lot size but we use leverage when we access our brokers to get a certain position size trade to begin with its part of the process, to say leverage has nothing to do with it

What i read when i see stuff like the numbers in this thread is when they are saying 1 buck per pip at 100:1 and 2 bux at 200:1 they are just not saying the long format of saying 1 buck and 2 lots = 2 bux and just cutting to the chase. and showing cummalitive pip value i dont really see a probelm with this.

The question would have to be.....
If I'm looking at different position sizes to determine which pip value I want to have, how exactly do I get that position size after I determine I want to trade xxx position size. What would I have to use ?

[stocksprofessor]

Mis-understanding leverage is the number ONE reason why people lose in forex trading. You should never trade more than 7 to 15 times you capital no matter what the leverage offered is. If you want to understand why, read an article at the following blog: Currency Trading | Forex Trading

I plan to write an article about the same topic in my blog in which I posted recently an example of a "perfect trade" (more than 300 pips on EUR/USD): Stock Trading | Options Trading | Forex Trading

[4xStar]

Originally Posted by kangi

What i read when i see stuff like the numbers in this thread is when they are saying 1 buck per pip at 100:1 and 2 bux at 200:1 they are just not saying the long format of saying 1 buck and 2 lots = 2 bux and just cutting to the chase. and showing cummalitive pip value i dont really see a probelm with this.

You're right, I knew there was something wrong with the way I was stating that. A pip is a pip but you can lose your capital faster with higher leverage. At 200:1 you can buy 2 lots for the same $100 that buys 1 lot at 100:1. That's how it gets dangerous for the inexperienced.

Originally Posted by kangi

The question would have to be.....
If I'm looking at different position sizes to determine which pip value I want to have, how exactly do I get that position size after I determine I want to trade xxx position size. What would I have to use ?

Hmm ... google and you shall find, I found a site called forexcalc dot com that has 2 calculators, one for position size and one for risk calculation.

However I need one that you can put in several variables and compute the missing one .. like put in # positions held, max pip loss per position, max % amount of capital to risk... and it will compute the amount of capital needed. Or put in capital amount & leave out max pip loss and it will compute that. Maybe I can try making one in Excel, if I succeed, I will post it.

Yes this leverage thing is a hard one to wrap one's mind around .. and then you have to remember all that algebra stuff....

[kangi]

4x..

"The question would have to be.....
If I'm looking at different position sizes to determine which pip value I want to have, how exactly do I get that position size after I determine I want to trade xxx position size. What would I have to use ? - kangi"

"Hmm ... google and you shall find, I found a site called forexcalc dot com that has 2 calculators, one for position size and one for risk calculation. -4x"

kinda missed what i was drilling at, i wasnt really asking a question of what would i have to use as in i dont know the answer, was trying to get rhody to fill in the blank for me and say the word leverage.... ;o)

Can't just magically snap your fingers and have xxx position size, leverage is a factor in position size which is a factor in pip value. Not saying rhody hasn't been around the block, I think merely trying to get to the bottom of what he wants to define as the definition behind leverage ..

Cause no one on this thread was talking about a 1:1 conversion at a bank for buy and hold. If 10k lot is $1 buck per pip regardless of 10:1 or million:1 bottom line it still takes leverage to get that 10k lot with an online dealer

[4xStar]

Originally Posted by kangi

kinda missed what i was drilling at, i wasnt really asking a question of what would i have to use as in i dont know the answer, was trying to get rhody to fill in the blank for me and say the word leverage.... ;o)

Gotcha now

[juddbo]

When I posted this I certainly didn't intend for a theoretical and academic discussions to take place but am certainly glad it sparked the discourse below as it certainly is more complicated than it appears to be, which is why the question was asked in the frist place.

As I read thru these threads and I look back at what i was originally asking, it seems that it can be brought down to one simple concept. Recall, that I was asking how to determine position size and or leverage while utilizing a stop. At the end of the day, if I want to risk 3% of my account size per trade and I am utilizing a stop loss, I should really only be concerned about what the loss is up to my stop, not counting for any slippage. Position size and leverage are essentially irrelevant at that point aren't they? The reasoning is becaue of the stop. Whatever the two variables end up being they ultimately adjust due to the stop loss value assumed if hit. Higher leverage, lower position size (units). Lower leverage, higher position size. What am I missing? I have been demoing on an account with Oanda and this seems to play out exactly as I am saying. Recall I am green at this, so again, what am I missing?