Position sizing vs base currency calculation

[mtheriault]

Hello

I'm lost on some calculation

Base currency AUD$
Risk allowed 500$ (AUD$)
Pip risked 45

Transaction Short EUR/GBP


My question how do i calcultate my position size to insure that my risk will be limited to 500$ in my base currency.

Martin

[pipso facto]

Hello

I'm lost on some calculation

Base currency AUD$
Risk allowed 500$ (AUD$)
Pip risked 45

Transaction Short EUR/GBP


My question how do i calcultate my position size to insure that my risk will be limited to 500$ in my base currency.

Martin

First, convert AUD to EUR. Using 0.6150 as our rate, we would get:
AUD$500 * 0.6150 = 307.5

So you are risking 307.5 Euros

Then, since when you open 1 Mini Contract (10,000), each 1 pip move = 1 Euro, divide 307.5 by 45 (the amount you're risking in pips). You get 6.83. That is the amount of Mini Contracts you want to open.

Round that up or down, so if open 6 or 7 Mini Contracts in EUR/GPB, and your trade goes against you by 40 pips, you will have lost a little more or a little less than AUD$500

Hope this helps

[mtheriault]

Thank you Pipso Facto

Neat & Clear

Martin

[pipso facto]

You're welcome.

[Clint]

Hello

I'm lost on some calculation

Base currency AUD$
Risk allowed 500$ (AUD$)
Pip risked 45

Transaction Short EUR/GBP


My question how do i calculate my position size to insure that my risk will be limited to 500$ in my base currency.

Martin

Hi, Martin

The calculation shown in the previous post is incorrect. The calculation done by Pipso Facto was incorrectly based on the
current price of the EUR/AUD, which has no bearing on this problem.

The determination of a pip-value depends on the cross-currency (the GBP in this case), not on the base currency
(the EUR in this case).



The correct calculation is as follows:

For the EUR/GBP pair, the value of 1 pip in AUD is: 1 AUD x the current price of the GBP/AUD
= 1 x 1.80826 = 1.80826 AUD per mini-lot.

You have established your total risk in dollars to be 500 AUD.
Your total risk in pips would then be: 500 AUD / 1.80826 = 276.5 pips.

Your risk in pips per mini-lot is 45. Therefore, the number of mini-lots to trade would be: 276.5 / 45 = 6.14,
which you would round down to 6 mini-lots.



This calculation produced an answer close to that of Pipso Facto's incorrect calculation, because the value of the GBP/AUD
is close to the value of the EUR/AUD.

If the original problem had been to determine position size for a trade involving the EUR/JPY, rather than the EUR/GBP, the incorrect method of calculation would have yielded a result much different from the correct result.



Here is the correct calculation for a trade involving the EUR/JPY:

For the EUR/JPY pair, the value of 1 pip in AUD is: 100 AUD / the current price of the AUD/JPY
= 100 / 82.5462 = 1.21144 AUD per mini-lot.

You have established your total risk in dollars to be 500 AUD.
Your total risk in pips would then be: 500 AUD / 1.21144 = 412.73 pips.

Your risk in pips per mini-lot is 45. Therefore, the number of mini-lots to trade would be: 412.73 / 45 = 9.17,
which you would round down to 9 mini-lots.

(If you use Pipso Facto's method to calculate the EUR/JPY trade, you will get the same answer as for the EUR/GBP trade,
i.e. 6 mini-lots, which is incorrect.)



The calculations, above, were done to illustrate the mathematical basis for the following simple formula:

Position size = Risk, in dollars / [(Stop-loss, in pips) x (Pip-value, in dollars)]

Let's apply the formula to the two trades discussed above.

You have specified your risk, in dollars, as 500 AUD, and you have specified your stop-loss as 45 pips. From your broker's platform, or from a pip-value calculator, you find the dollar-value of 1 pip for the pair you are trading, and enter these values into the formula, as follows:

For the EUR/GBP trade: Position size = $500 / (45 x 1.80826) = 6.14 mini-lots, which you round down to 6 mini-lots.

For the EUR/JPY trade: Position size = $500 / (45 x 1.21144) = 9.17 mini-lots, which you round down to 9 mini-lots.



Here is a handy online pip-value calculator: Pip Value Calculator, Pip Calculator, Pip Value Information


Clint


p.s. --- Just to be clear on terminology, "base currency" refers to the first currency named in a pair, for instance,
EUR in the EUR/GBP pair. In your case, the AUD should be referred to as your "account currency", not your "base currency".

[pipso facto]

I stand corrected. Clint is absolutely correct.

[mtheriault]

Hello Clint

Thanks for the reply, i will re-read it again to fully understand it.

Thanks you also Piso Facto. As long as there is a dicussion, we always learn.

Martin

[mtheriault]

Hello Clint

Is it ok to say: IF

Account currency: AUD
Pair to trade : EURGBP

Sell EURGBP Risk = AUD$ * (GBP/AUD) value
BUY EURGBP Risk = AUD$ * (EUR/AUD) value

Martin

[sb00]

Sorry to bump such an old thread, but felt this was most relevant.

Thanks to Clint, it was easy to determine position size. However, my broker (IB) is an odd-one-out for forex. There are no lot sizes, and you simply enter any order size in the base currency value.
For example, in USD/CAD, 30,000 would be your typical 3 mini lots at most brokers. However, if trading say GBP/CAD, the order would need to be placed in GBP.

With the account currency as USD, how would I setup a formula to easily convert typical USD lot amounts into other currencies?

Here are some random examples from today:
GBP/CAD: Risk: $127.50, Stop: 20 pips, ends up equating to 6.38 Lots. To convert this, I did 6.38 (CAD mini lots)*10,000(1 USD mini lot) = 63800. Then 63800 / 1.5237 (current GBP/USD price) = 41872 GBP. Unfortunately this is incorrect, as my risk value isnt hit until 30 pips, not 20 pips.

AUD/CHF: Risk: $127.50, Stop: 20 pips, ends up equating to 6.86 Lots. To convert this, I did 6.86 (CHF mini lots)*10,000(1 USD mini lot) = 68600. Then 68600 / 0.9253 (current AUD/USD price) = 74138 AUD. Unfortunately this is incorrect, as my risk value isnt hit until 17 pips, not 20 pips.

A bit confused, so any help/advice is welcome

[Clint]

sb00,

Referring to post #5 on this thread, here is the link to a useful pip-value calculator:

Pip Value Calculator, Pip Calculator, Pip Value Information



And here is the formula for Position Size: Position size = Risk, in dollars / [(Stop-loss, in pips) x (Pip-value, in dollars)]

When I derived and published this formula, I took a small short-cut, which I will now undo.

In the formula, it is understood that:

• position size is given in "lots" of some size,
  
  
• pip-value actually means pip-value per "lot", and
  
  
• the "lots" have to agree on both sides of the equation.

Spelling this out explicitly, we get:

• Position size in STANDARD LOTS = Risk, in dollars / [(Stop-loss, in pips) x (Pip-value, in dollars per STANDARD LOT)]
  
  
• Position size in MINI LOTS = Risk, in dollars / [(Stop-loss, in pips) x (Pip-value, in dollars per MINI LOT)]
  
  
• Position size in MICRO LOTS = Risk, in dollars / [(Stop-loss, in pips) x (Pip-value, in dollars per MICRO LOT)]
  
  
• Position size in UNITS = Risk, in dollars / [(Stop-loss, in pips) x (Pip-value, in dollars per UNIT)]

Let's use the pip-value calculator, and the 4th equation given above, to solve your AUD/CHF example. (Your GBP/CAD example is less interesting for this reason: the pip-value of the GBP/CAD is essentially equal to the pip-value of the GBP/USD, due to the fact that the USD/CAD is close to 1.0000. I'll leave it to you to solve that one.)



Here's your AUD/CHF example: Trading the AUD/CHF in a USD-denominated account in which positions are sized in UNITS.
Trade risk = $127.50. Stop-loss = 20 pips.

Using the pip-value calculator, we enter:

• Account currency --- USD
  
  
• Currency Pair --- AUD/CHF
  
  
• Position Size, units --- 1
  
  
• Current USD/CHF Ask price --- 1.0704 (which is what it happened to be when I was typing this)

And the pip-value calculator tells us that the pip-value in dollars per UNIT is: $0.00009342301 per UNIT



Putting this value into the 4th equation, above, we get:

Position size in UNITS = $127.50 / [(20 pips) x $0.00009342301 per pip per UNIT)] = 68,238 UNITS

The position size calculated above is obviously = 6.82 MINI LOTS = 68.2 MICRO LOTS. If you were trading in a Mini Account, you might decide to trade 7 mini-lots, if you were comfortable with a tad more trade risk (than the $127.50 you originally specified).
If you were trading in a Micro Account, your postion size would be 68 micro-lots.



In your post, you incorrectly applied the price of the AUD/USD to your calculation. Note that this price does not figure into the pip-value calculation. Pip-values are determined by the cross-currency (not the base currency) in every case. Therefore, all pairs of the form XXX/CHF have the same pip-value, given a particular account currency.

In the case of the Swiss franc, sometimes the CHF is the base currency in a pair, and sometimes it's the cross-currency --- it all depends on what it's paired with.

In the case of the yen, on the other hand, the JPY is always the cross-currency, regardless of what it's paired with. Therefore, ALL yen pairs have the same pip-value, given a particular account currency.

I hope that answers all of your questions.