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!