A question from "Calculating Position Sizes" article

Beginner Questions
1

I have a question about the below from the baby pips school…

Next we divide the amount risked by the stop to find the value per pip.

(USD 50)/(200 pips) = USD 0.25/pip

Lastly, we multiply the value per pip by a known unit/pip value ratio of EUR/USD. In this case, with 10k units (or one mini lot), each pip move is worth USD 1.

USD 0.25 per pip * ((10k units of EUR/USD)/(USD 1 per pip)) = 2,500 units of EUR/USD

So, Newbie Ned should put on 2,500 units of EUR/USD or less to stay within his risk comfort level with his current trade setup.

Read more: (can’t post links yet, but it’s the “Calculating Position Sizes” from Senior Year of Undergrad) ]

I understand that we need to figure out how many pips the trader can stand before they get out, but I guess I am not connecting all the dots…

So if you want to only risk 1% of your $5000 account, you put up $50. Simple.

But then you want to figure out the value of this in terms of 200 pips? A 200 pip drop is the price lowering by $0.0001*200 = $0.02. So if the EUR/USD goes down by $0.02 (or 200 pips), you will have lost $50? I also do see how you get 2500 units mathematically, but I am lost at what that means and how it will bite you? I know the units are just parts of the lots? So if you got 1 microlot and lost 2500 units within the lot, you will lose $50?

I don’t see how knowing this helps me? I’m not really sure how to use all this information practically speaking. (But then again, I feel I am not connecting all the dots yet either)

Does this tie into leverage somehow? Do I assume Ned is leveraging at some rate?

Could someone help explain this concept of Position Size another way

(I think my big issue is my brain hasn’t started thinking of everything in terms of pips and lots and instead I am thinking of everything in terms of cash—any good articles on helping people distinguished and start thinking in terms of the pips/lots system?)

Thanks and LOVE the style here at babypips! Very fun to read this stuff!

2

hopefully this clears things up.

1 microlot= 1000 units
1 minilot= 10,000 units
1 standard lot=100,000 units

1microlot= 10cents a lot
1 minilot= $1 a lot
1 standard lot = $10 a lot

lastly, if you lose 2500 units, you lose 2.5 micro lots (which is 25 cents a pip). If you multiply your 25 cents a pip X 200 pips you get…$50

3

First off, U… C… L… A! UCLA FIGHT FIGHT FIGHT!

Fellow Bruin here too. I am an engineering major which almost makes me embarrassed I’m not getting this, considering all the crazy circuits and comms classes I had to take! I think it is because I am over-thinking it though.

So, a microlot is always 10 cents? And a mini lot is always $1? That is just a given?

I interpreted it as a microlot is 1000 “shares”/units of a pair. So if EUR/USD is trading at $1.40, then buying a microlot will cost:

$1.40 * 1000 = $1400.

Definitely not $0.10.

So if a microlot really is $0.10, then I definitely am mixing up two concepts and am a bit lost right now. I guess I could reread the beginning of babypips school, but if you can help me clear this up, that’d be really cool man!

4

Are you confused about what “position size” is? — Or are you confused about how to calculate position size?

From your question, I can’t tell for sure which it is. So, I will try to answer both.

[B]What is position size?[/B]

When you trade a curency pair, you take either a LONG position, or a SHORT position, in a particular pair. You are speculating on the CHANGE in the relative value of the base currency with respect to the cross-currency.

If you were to speculate on the CHANGE in the value of [I]one unit[/I] of base currency, your profit or loss would be tiny. It wouldn’t be worth your time to do it. To make speculating on currency values worthwhile, the quantity of currency in play must be substantial. [I]That quantity is what we call position size.[/I]

In the forex market, quantities of base currency are usually stated in lots. Before the advent of small-time, retail forex trading, currencies were traded only in “standard” lots of 100,000 units of base currency. Example: a standard lot of GBP/USD is £100,000. One bank might trade 50 lots (£5,000,000) with another bank. And so forth.

When the forex market began to cater to small, retail traders, standard lots were too large for many of them. So, retail forex brokers created smaller lot-sizes: mini-lots = 10,000 units of base currency; micro-lots = 1,000 units; and nano-lots = 100 units. Some retail forex brokers even allow trading in unit increments. Example: with such a broker, you could trade 10 units, or 27 units, or 55 units of base currency, etc.

With most retail brokers, if you open a micro account, you will be permitted to trade in increments of micro-lots — i.e., 1,000 units, 2,000 units, 3,000 units, etc. [I]In each case, these quantities of base currency are referred to as position size.[/I]

Position size can be stated in lots, or in units. A position size of 1 micro-lot is a position size of 1,000 units. A position size of 3 nano-lots is a position size of 300 units. A position size of 7 mini-lots is a position size of 70,000 units. And so forth.

[B]How do you calculate position size? [/B]

If the lessons in the Babypips School are confusing you, here’s a different way of calculating position size which might make it clearer for you.

Note that “number of lots” and “position size” mean the same thing.

Here is a [B]Position Size Formula[/B] (equation) which works for any size account, any lot-size (standard, mini, micro, or nano), any pre-selected risk percentage, any size stop-loss, and any currency pair.

Number of Lots = [(Account Balance, in dollars) x (Risk %)] / [(Stop Loss, in pips) x (Pip Value, in dollars)]

Here is a post where this equation is explained, and examples are given — 301 Moved Permanently

I hope this helps you.

5

It’s nice that my broker lists what a pip is worth per 1000 lot. One unit micro lot is 1000 equivalent to $.10 per pip. So, it depends on your lot size. If you want to risk 1% of 5000 ($50) it then depends on how many lots you want to trade. 1 lot = $.10 per pip. Your risk is how far the other direction it can go on your trade. With $50 risk and 1 lot traded your trade can go the other way 500 pips. 2 lots 250 pips. 3 lots it can go 166 pips… and so on.

So, you have to be able to look at the chart and determine how far the other direction you can tolerate it to go (risk) and that determines your lot size based on utilizing 1% of your account. I’m new as well and have been crunching numbers all day.

Whatever your method of determining where the market is going to go should tell you when things are definitely not going your direction, let that be where you would stop the trade and let that determine your lot size. Bunches of number crunching but totally necessary.

My take on it anyway. :slight_smile:

and Clint beat me to it!

6

Clink, Thank you it is starting to clear up. I will digest this. The thread where you explained that formula helped a lot too.

I think I basically didn’t understand the concept of why a
standard lot = $10
mini lot = $1
micro lot = $0.10

But it is making more sense now. If a pip is always equal to $0.0001 and you are trading 100,000 units of a XXX/USD pair, than a 1 pip increase will get you $10.

Brokers only trade in units of standard, mini, micro lots—so if you don’t have enough money to purchase a full lot, then you need to borrow/leverage (I think).

To calculate position size, divide the amount of money you want to put up divided by the cost/loss incurred by a stop-loss.

I’m sort of typing out loud here, connecting the dots in my head. Thanks.

By the way, ironic someone named Clint replied to my thread---- do you recognize my screen name?

8

Most of us rely on our trading platforms to tell us the pip-value for any trade we are considering. The formulas by which pip-values are calculated are not known by the majority of forex traders. Those formulas are not complicated. However, there is a different set of pip-value formulas for every combination of (1) lot size, (2) cross-currency, and (3) account currency. Think about how many different permutations that creates.

The pip-values that you noted in your last post are correct for a dollar-denominated account, trading currency pairs in which the USD is the cross-currency.

The more you can take the mystery out of pip-values, the more comfortable you will be using the Position Size Formula that I gave you. Clearly, you’re well on your way to understanding pip-values.

For more on that subject, here’s a previous post — 301 Moved Permanently

Now, you’re running off the road.

You need to study these concepts: B account size, (2) position size, (3) maximum allowable leverage[/B] (dictated by law and/or your broker), B actual leverage used[/B] (determined by you when you place a trade), and B margin[/B] (determined by 2 and 3 above).

And you need to study the following relationships:

• [B]Position Size, in dollars = (Account Balance, in dollars) x (Actual Leverage Used)[/B]

This relationship can be expressed in the following form:

Actual Leverage Used = (Position Size, in dollars) / (Account Balance, in dollars)

• [B]Margin = 1 ÷ Maximum Allowable Leverage[/B]

This relationship can be expressed in the following form:

Maximum Allowable Leverage = 1 ÷ Margin

These concepts and relationships have been discussed in many threads and posts, here on this forum. Do a SEARCH for keywords [I]leverage[/I] and [I]margin[/I], to start your study.

p.s. ------ my mule don’t like it when you call me Clink

9

p.s. ------ my mule don’t like it when you call me Clink[/QUOTE]

LOL…LOL…it makes him think you’re making fun of him…LOL…well played