Position Size Calculator - where does leverage fit in?

Beginner Questions
21

I agree with Margaret.

A broker will want to offer you as high a loan as he can (i.e. leverage). All you need to do is by controlling your position size you control how much exposure you have in the market.

As a newbie, I think you should start with micro lots (0.01) which basically a 0.10 a pip then use the position size calculator to work out how many lots you will be using.

Also, I will be telling my broker when I start trading for real to set my leverage to 1:10 as that gives me peace of mind and yes, it will take longer to be profitable but it will allow me to sleep at night.

22

So if i have lets say 250 € in my account. [B](EURO ACCOUNT)[/B]
Want to trade EUR/USD at 1.2500 with a sell order target at 1.2480 and a stop loss at 1.2520 as a [B]20 PIP STOP LOSS[/B]
[B]Risking only 2% /trade[/B]
And a maximum [B]leverage of 200 :1.[/B]

Then:
If my trade is bad and stop loss hits,I would lose 5 € ?
I would have to use: 2500 lot (units)
And the used margin was: 12.5 €
The usable margin was : 237.5 €
The position size (buying power)altogether leveraged was: 2500 €
Effective leverage : 10 : 1

Is this correct?

23

Here’s my 2 cents Nice Simple and quick

Forex Money Management

24

This was a really beneficial post for me. I’ve looked everywhere for an answer to this: How do you calculate the total leverage being used for multiple positions on different instruments? So in this case, let’s say in addition to this trade with 5.9 leverage I have another trade with 1:1 leverage, would the total be 6.9:1 or 7:1 rounded? Thanks very much!

25

I’m glad that it helped you.

Sorry to be so long in replying to your post — I was chopping firewood all day.

Welcome to this forum, by the way.

Exactly right.

On multiple positions, you can figure the actual leverage used on each position, and then total the separate leverages (as you did in your example, above) — [B]or,[/B] you can add up the notional values of all your positions, and divide that total by your account balance.

Let’s do it both ways, just to be sure you have the concept.

Let’s say you have $1,000 in your forex account, and you place 3 trades in this account:

• trade #1: 1 micro lot of USD/JPY with a notional value of $1,000. (USD/JPY price doesn’t matter)

• trade #2: 2 micro lots of GBP/USD with a notional value of $3,124.60 (assuming GBP/USD = 1.5623)

• trade #3: 3 micro lots of EUR/JPY with a notional value of $3,666. (assuming EUR/USD = 1.2220)

[B]Method #1:[/B]

Figure the actual leverage used in each trade, and add those leverages to get the total leverage used.

You should know enough now to immediately see that trade #1 is utilizing 1:1 leverage, trade #2 is utilizing 3.1246:1 leverage, and trade #3 is utilizing 3.666:1 leverage. Adding these up, we get:

1 + 3.1246 + 3.666 = [B]7.7906:1[/B] (which you can round up to 7.8:1, or even 8:1 actual leverage used)

[B]Method #2:[/B]

Add up the notional values of your trades, and divide the total by your account balance.

Notional values: $1,000 + $3,124.60 + $3,666 = $7,790.60

Actual leverage used in these 3 trades = $7,790.60 ÷ $1,000 = [B]7.7906:1[/B] (exactly as in Method #1).

Here’s a homework assignment for you:

Make sure you understand [B]why[/B] the notional values calculated in the example above are what they are, based on the prices assumed in the example.

26

who ARE you??

27

On BP’s position calculator if I am trading AUD/JPY what is to be entered into the “price for” box. In this case it is asking for the price for USD/JPY.

28

Hello, John. Welcome to this forum.

If I understand your question, you are asking this:

When figuring the correct position size for an AUD/JPY trade in a USD-denominated account, why does the Position Size Calculator ask for the current price of [U]USD/JPY[/U], rather than the current price of AUD/JPY ?

Do I have that right ?

Assuming that I have correctly interpreted your question, I will attempt an answer.

Let’s say that you have filled in the first 4 boxes in the Position Size Calculator. I’ll make up some numbers for the purpose of this example.

Let’s say that you have entered:

• Account Currency USD
• Account Balance 5000
• Risk Percentage 3
• Stop Loss in Pips 40

At this point, the Calculator can figure your RISK in USD (3% of $5,000 = $150). But, it doesn’t yet “know” what pips you are talking about, because it doesn’t “know” which pair you are going to trade.

So, you enter:

• Currency Pair AUD/JPY

Now, the Calculator “knows” what a pip is — it “knows” that a pip is 1/10000 of a JPY, and 40 pips is 40/10000 of a JPY.

But, [B]in order to equate 40/10000 of a JPY to 150 USD[/B] (your specified risk), the Calculator needs to “know” how to convert JPY to USD.

[B]And that’s why it asks you for the current value of USD/JPY.[/B]

So, you enter:

• USD/JPY = 119.920 (for example)

The Calculator now has everything it needs. You hit “Calculate”, and out pops the answer:

• 44,970 units of AUD/JPY
(or 4 mini-lots, or 44 micro-lots, depending on what lot-size your platform utilizes)

If it still seems counter-intuitive to you that the Calculator does not need the price of AUD/JPY in order to figure your position size, just keep reviewing the steps in the logic, above, until you get it.

30

Clint when I messaged you yesterday you told me that that if the account denomination is the same as quote currency the exchange rate does not count when calculating the used leverage but in this post you say otherwise “trade #2 2 micro lots of GBP/USD with a notional value of 3124.60 $ (assuming GBP/USD = 1.5623)” the account denomination on this example being USD.

So the result of what you told me yesterday vs the result of the post you wroted:

The Notional Value with exchange rate added: 3124.60 USD
The Notional Value without the exchange rate: 2000 USD

Because of this post I just wasted 1 week of my life trying to figure out how to find used leverage formula.

You are contradicting yourself and you confused me too so I will leave this forum for good and only continue studying the school pf pipsology on this site.

31

The post you are complaining about (above) is correct.

My reply to your PM contained a regrettable error. I apologize for that.

Probably, for you and for this forum, that would be the best thing for you to do.

32

I appreciate that you acknowledge your mistakes. Ita rare quality these days but the example with the JPY denomination and USD/JPY remains unanswered or incorrect. Im sorry that I have to be in this way really but I have a high standard for learning and everything that I learn I note it on paper and put it in a place with other stuff (not basic stuff) because sometime in the future If I have to deal with a problem like this and I cant remember how to resolve it I know that I have my notes. The information about used leverage on other sites (2 sites) was pretty poor but you spoke into details on this forum. I used your information from your comment and calculated and the results were the same everything was good. Probably In case of JPY denomination it needs something added in the formula I don`t know. Anyway I will probably not need to open a JPY account in my life but my point was to test the validity of the formula. When I messaged you I was expecting to tell me that I have to add something to the formula. So Clint I just want to ask you one last question and If you could answer me I would be thankful to you because I really want to end this leverage thing and I really want to return on my system developing and learning. The correct way of calculating the used leverage is from your comment? Thanks in advance!

33

Hi. When you say 45 pip stop loss, do you mean there is no pipette or micro pip, as it would look like 450 pips when you type it on the babypips position size calculator with a micro pip.

34

The Babypips Position Size Calculator asks for stop-loss in pips.

45 pips would be entered as 45, as in the previous example.

If you want to include fractional pips (pipettes) in your stop-loss, then enter them in the mathematically correct way, as follows:

45.5 pips would be entered as 45.5 (the Calculator will accept that entry without a problem)

If you were to enter 455, the Calculator would assume that you can read – and, because it asked you for pips, not pipettes, it would accept that number as 455 pips.

1 Like
35

Thank you for the response. I’ve been wondering for a while now how to put my stop loss in my trades as I get cents when I my trades go my way. Then I saw your answer and I tried to input the numbers that you gave on the babypips position size calculator. Then I got it. I always assumed that since the trading platform is giving me a pipette, my stop loss should be in 3 figures. But because of your answer, I now understand that the decimal point is the pipette. Cheers!

36

@Clint Hi my friend! Thank you for your great answer on this topic. I would like to add a question to this topic. I understand everything you have said except for one part of it and it would be great if you could further explain it.

On the formula to figure out the actual leverage used you divide at the end by the account balance. Why divide by the account balance? Why not divide by the margin used in the trade (the 1% amount)?

Kind Regards Clint,

37

Hi, and welcome to this forum.

Sorry for the late reply.

Actual leverage used is defined as the ratio of open positions to account balance.

Actual leverage used is calculated as position size (in dollars) divided by account balance (in dollars) – assuming your account currency is USD. If your account is denominated in some currency other than USD, then simply substitute your account currency for dollars in the formula above.

Note that actual leverage used is totally distinct from maximum allowable leverage (broker leverage). Maximum allowable leverage is the limit placed on your use of leverage. You may use any amount of leverage you want, up to the limit. You may not exceed the limit. In the U.S., the CFTC dictates that maximum allowable leverage shall be 50:1 on major pairs. Brokers can (and most do) limit maximum allowable leverage to levels even lower than 50:1 on certain pairs, under certain circumstances.

Regarding your second question –

Dividing the notional value of a position by 1% of that value would always equal 100. Or, stated as a leverage ratio, it would always equal 100:1. This would be the calculated result, regardless of the size of the position.

What would be the point of such a calculation?