I have 2 questions…
Where does leverage come into calculating position size (if at all)?
Is there a broker with a demo stream on mt4 with variable leverage?
First of all, your broker has a fixed leverage amount for your account.
So, you can’t do anything about leverage from that end, but YOU control your leverage used by your lot size.
With that being said, forget about leverage, and figure what percent of your account you are willing to risk, and go at it from that angle.
The rule of thumb is usually 2% or so. Next you figure how big your stop will be according to your trade entry, and know your pip value based on that number.
For instance, if your account has a nice even $1000 in it, and you want to risk 2%, that is $20.
With $1000, you could trade a full mini lot of EUR/USD, but with a pip value of $1.00 each, that would only give you a 20 pip stop.
However, if you traded 5 micro lots, your pips would be valued at $0.50 a piece, and your stop would be 40 pips away. 1 micro lot at $0.10 a pip would let you place your stop 100 pips away, and so on.
Leverage has nothing to do with it, although your leverage changes each time you bump up your lot sizes. Here’s the way it would work. At 100:1 leverage, your mini lot EUR/USD would use $133 or so as margin to enter the trade. You would have $866 of usable margin left. Technically, your leverage would not be 100 to one, because you are trading a 10k lot size with a mini. So, your leverage would be more like 10:1.
If you traded one micro lot, that would be a 1k lot size, and your leverage would actually be 1:1 because that is the amount in your account. (Although it is slightly higher in both instances, based on the EUR/USD conversion rate to buy into the trade)
So quick rundown. Find your risk level, whether it’s 0.5%, 1%, 2% or whatever. Next, find your stop loss size according to pip value, and base your lot sizes off that to keep risk in check. And don’t worry about the leverage number. That will work out all by itself if you do your math right.
Clint has posted some great formulas for finding pip to risk value fairly easily, and I know there’s a pip size calculator in the BabyPips school somewhere as well.
Cheers!
Thanks this is an excellent response but I still have a question,
So if I open an account (demo) with $2.5k with 1:1 Leverage, am I limited in my position sizing. For instance I want to risk 1% so 25$ with a 25 pip stop so $1 per pip. I would therefore need to trade 1 mini lot ($10k) for 1 pip to be $1 in value. But I only have $2.5k in my account? Do I need to open an account with a certain amount of leverage to start with in order to effectively utilise the correct position size in line with my risk tolerance and s/l requirement?
I think Alpari lets you choose margin when you sign up. Maybe Oanda. I know several demos I have tried let you choose. Im pretty sure every broker has an option that lets you choose default margin/leverage. I have 50:1 on all my cash and demo accts, so I know I had to select that option at some point.
You seem to have a basic understanding of how to figure risk (except for one problem — it isn’t correct to assume that pip-values are $1 per pip, just because you’re trading mini-lots).
And, you seem to be confused about leverage — in your example, you talked about 1:1 leverage, and then you described a trade in which your position size is 4 times your account balance.
[B]So, let’s take it from the top —[/B]
The term “leverage” can refer to either of two different, but related, things:
B the maximum leverage which your broker will allow you to use[/B]
- or -
B the portion of that maximum allowable leverage which you choose to use[/B]
To illustrate the difference between these two forms of leverage, let’s suppose that you open forex trading accounts with four different brokers, as follows:
• FXCM in the U.S., offering 50:1 leverage (the maximum allowed by law in this country)
• City Credit Capital in the U.K., offering 100:1 leverage
• FinFX in Finland, offering 300:1 leverage
• Trading Point in Cyprus, offering 500:1 leverage
And, using the numbers from your example, let’s say that you deposit $2,500 in each of these four accounts. Then, you place identical trades with these four brokers, as follows: one mini-lot of USD/JPY, with a 25-pip stop-loss.
Now, let’s analyze your position in each of these four accounts:
In each case, your position size (1 mini-lot) is 10,000 units of base currency. The base currency in the USD/JPY pair is U.S. dollars, so your position size is $10,000 in each account. [B]You are using actual leverage of 4:1[/B] in each account, because your position size is 4 times the size of your account.
Your [B]risk[/B] on each of these trades depends on three things: your stop-loss in pips, the dollar-value of 1 pip, and the number of lots in your position. We already know two of those things: your stop-loss is 25 pips, and you have 1 mini-lot onboard. Your trading platform (or a pip-value calculator) can tell you the third thing — the dollar-value of 1 pip. At current price levels, the USD/JPY has a pip-value of $1.30 per pip, per mini-lot.
From this, we calculate that your risk (in dollars) is 25 pips x $1.30 per pip per mini-lot x 1 mini-lot = $32.50 for each position in your four accounts. And we also calculate that your risk (as a percentage of your account balance) is $32.50 / $2,500 = 1.3% in each account.
Notice that the actual leverage you are using is the same in these four accounts. And your risk, in dollar terms and in percentage terms, is the same in these four accounts. So, what difference does it make that your four brokers offer four different “leverages”?
Your broker’s maximum allowable leverage can matter to you in two different, but closely related, ways: (1) it’s a limit on the amount of leverage you can actually use, and (2) it determines how much margin is required from you on each trade that you place. Let’s look at these two factors.
B[/B] The four brokers in our example limit you to leverage [B]not to exceed[/B] 50:1, 100:1, 300:1 and 500:1, respectively. But, as a newbie, you should never consider taking on a position [B]even close[/B] to 50 times your account size. So, as long as you are taking prudent risks, none of the various “leverages” offered by these four brokers will actually limit your ability to trade the way you want to trade.
Later in your career as a trader, if you become expert at this business, you may become competent to trade prudently with high leverage, in specific situations. In that circumstance, if your broker’s “low” maximum allowable leverage becomes a problem, it won’t actually be the [B]leverage[/B], per se, which will be the problem — rather, [B]total margin required on all of your open trades[/B], will be the problem.
B[/B] [B]Margin[/B] is a portion of [B]your[/B] money which your broker sets aside — puts out of your reach and out of your control — for the duration of your trade. It’s purpose is to provide a “cushion” between a [B]major loss[/B] in your account and a [B]total wipe-out[/B] of your account. In simple terms, if your account is consumed by losses, when your balance has dwindled to the point that only your margin is left, your broker will close all your positions. He will then “un-freeze” your margin, and return it to your account. At that point, this margin amount will be all you have left.
Margin is inversely proportional to maximum allowable leverage. (Margin = 1 / maximum allowable leverage.)
So, here’s where your four brokers differ:
• FXCM will require 2% margin on your trade (because 1 / 50 = 0.02 = 2%). And 2% of $10,000 is $200.
So, $200 of your money will be tied up in margin, while your trade is open.
• City Credit Capital will require 1% margin (1 / 100 = 1%), which is $100 of your money tied up in margin.
• FinFX will require one-third of 1% margin, which is $33.33 of your money in margin.
• Trading Point will require one-fifth of 1% margin, which is $20 of your money in margin.
These margin amounts are not actually “costs”, because every penny of your margin is returned to your account when your trade is closed, regardless of whether your trade ended in profit or loss.
But, in some circumstances, your trading could be hampered by excessive margin requirements — even if you are trading in a careful and prudent fashion. The good news for you, as a newbie, is that those circumstances will not impact your trading at this stage of your development.
Here are two Rules of Thumb regarding leverage:
Concerning broker leverage (maximum allowable leverage) — If you have a choice between high broker leverage and low broker leverage, all else being equal, choose high broker leverage. The higher, the better.
Concerning the actual leverage you use — If you take prudent risks, by trading with appropriate position sizes, then the actual leverage you are using will take care of itself. You can plan each trade without being concerned with leverage, with margins, or with margin-calls.
2 Likes
Thank you Clint,
So at my stage of only demo trading I should be looking for a large amount of lerverage in order to trade using the correct position size in line with my risk management?
e.g. if I’m learning to trade on pairs with the USD as the quote currency exclusively (for arguments sake) then in order to place a trade with 1% risk on my $2.5k ($25) with a s/l of 25 pips I would be trading 1 mini lot? In order to be able to trade 1 mini lot I will be using 4:1 leverage. Having 1:1 leverage (which I have at the moment) means I cannot afford to trade this lot therefore I need to open a demo account with a higher leverage (at least 4:1, but preferably higher?). So if I opt for 1:10 Leverage then my required margin to trade will be 10% of my account ($250), despite my risk management only allowing a loss of $25?
It seems to be more complicated when either the account currency or the quote currency are not in USD. Can you open an account with GBP for example but have it converted into USD when depositing it into a trading account to simplify the process?
Yes. 100:1 is pretty much the world standard.
Don’t settle for less than 100:1 (unless you’re in the Fascist States of America, where we are restricted to 50:1 by the Commodity Futures Trading Gestapo).
Yes. In this case, Risk = 25 pips x $1 per pip per mini-lot x 1 mini-lot = $25 = 1% of your account balance.
Consider a Micro Account, in which the minimum trade size is 1 micro-lot (1,000 units of base currency). With such an account, you can trade the equivalent of fractional mini-lots.
Example: 1 micro-lot = 1/10 mini-lot. 5 micro-lots = ½ mini-lot. And so forth. That way, if you decide to use a 30-pip stop-loss (instead of 25 pips), while maintaining a risk percentage of 1% or less, you can scale down your position size (below 1 mini-lot).
You can do the math, and figure out whether 9 micro-lots, or 8 micro-lots, etc., would be the correct position size, in line with a 30-pip stop-loss and risk of 1% or less.
I really think you should forget about 4:1. Go for 100:1. It will make life a lot easier for you.
Forget about 10:1. Go for 100:1.
I will be able to understand some of your questions better, if you give me a little more information.
Where are you located?
Who is your broker?
What account currency do you intend to maintain?
Here’s a very useful tool I use to quickly calculate position size based on % risk, SL, etc…
That’s a good one, for sure.
But, you can find the same calculator right here on the Babypips site —
Position Size Calculator: Free Online Forex Position Sizing Calculator
However… I would encourage all brand-new newbies to learn how to calculate position sizes [B]by hand,[/B] before blindly adopting any calculator.
Throughout your career as a forex trader, it will be to your advantage to know how and why things are calculated the way they are. Learning to do it the hard way, by hand, will fix the principles in your mind.
I completely agree, Clint! I come from the slide-rule era (well, almost anyway). Learning how to calculate things by hand…quickly…is an important skill that you’ll want to have…
i think that leverage 1:200 is useful to for small accounts (not more than $1000) but i’m afraid to use leverages more then 1:200. And about position size - its very good when you have opportunity to work with micro lots - so you can open, for example, 0.45 lots or some like this
I’m located in London, I’m demoing with FXCM (I think) and I currently am using $5k demo. The question arose because I opened a demo account with £2k and 1:1 leverage (thinking I was being prudent) then did not have sufficient funds to open the position size I calculated with my risk management parameters so thats when I thought “ah I’ve done something wrong here”. Now thanks to the replys I understand there are 2 “tiers” of leverage, your initial leverage and the leverage thats applied based on your position sizing and SL requirements.
Thank you again.
Thank you for [I]your[/I] reply. I’m glad this thread has been helpful to you.
Amen. “-sigh-” Good thing I had to help my son with his Algebra… 
Thanks Clint - this is a big help.
Mike
Hello Master Tang,
You say that with the actual 10:1 leverage, the dollar amount of the margin would be $133. Please explain why it wouldn’t be an even $100. (1/10 of $1000 = $100). Please clarify the factor or factors that I seem to be missing, and, if you would, please provide an example with the math.
Thanks!
Vpip
Hi Clint,
You wrote, “It isn’t correct to assume that pip-values are $1 per pip, just because you’re trading mini-lots.” Under what circumstances would that be the case? I assume that it would be $1 per pip per mini. Am I mistaken? Please explain the factors involved.
Thank you,
Vpip
Pip-values are $1 per pip per mini-lot ONLY when the quote-currency in the pair you are trading AND your account currency are both USD.
As an example, if your account currency is USD, and you are trading EUR/USD, then 1 pip is worth $1 per mini-lot.
But, if your account currency is USD, and you are trading USD/JPY, then the value of 1 pip depends on the (fluctuating) price of the USD/JPY pair. Currently, the USD/JPY = 122.16. Given that price, the current pip-value for USD/JPY in a USD-denominated account is $0.82 (rounded off) per pip per mini-lot.
Spend some time working with the Pip Calculator on this website. Use it to calculate pip-values for various pairs to get familiar with these relationships.
You will discover that (at any given time) all pairs having the same quote-currency have the same pip-values.
For example, USD/CAD, EUR/CAD, GBP/CAD, etc., all have the same pip-value — currently (in a USD-denominated account) $0.79 per pip per mini-lot (rounded off), based on the current price of 1.2720 for USD/CAD.
This pattern holds for accounts denominated in currencies [I]other than the USD[/I], as well.
For example, if your account currency is GBP, and you are trading EUR/GBP, then 1 pip is worth £1 per mini-lot.
If your account currency is CAD, and you are trading USD/CAD, then 1 pip is worth CA$1 per mini-lot.
And so forth.
Yen-pairs are an exception to the above pattern. If your account is denominated in JPY, and you trade [I]any[/I] yen-pair (because [I]all yen-pairs[/I] have the JPY as the quote-currency), then 1 pip is worth ¥100 per mini-lot (not ¥1).
There’s one weird quirk in the Babypips Pip-Value Calculator.
As noted above, whenever the quote-currency matches the account currency, then the pip-value per mini-lot is [I]always[/I] 1 unit of the account currency, [I]regardless of any currency price.[/I]
Nevertheless, [I]even when the quote-currency matches the account currency,[/I] the Pip-Value Calculator demands that you enter an ASK PRICE. If you don’t, it won’t do the calculation for you. But, the price you enter is meaningless. You can enter [I]any price[/I] — even a ridiculous price like 750.0000 — and you will get the same result, which is 1 unit of the account currency. Try it.
.
1 Like
Hi Clint,
Your response began, “Pip-values are $1 per pip per mini-lot ONLY when the quote-currency in the pair you are trading AND your account currency are both USD. . . .”
Very clear.
Thanks,
Vpip
Clint, you’ve got many gems hidden in the vast archives of the forums. Thanks for all of your insight, and wow, for still being around so many years later! Amazing what you’ve shared!
Yes, there have so many brokers with this service! You have to just pick up a good broker (transparent).