Calculating Pip Value, Risk & Lot Size with Leverage

Beginner Questions
1

Hello everyone, I’m new to baby pips and Forex in general. I just started learning a few weeks ago through a course on Udemy. I then found this site, which is a great addition for continuing my education into the world of Forex. I have been having a tough time not in understanding leverage itself, but how it applies to a lot of the formulas for Pip Value, Risk and Lot Size (Position Size). I’ve spent some time playing around with numbers and I think it finally clicked with me. I just want to lay out what I’ve discovered and hopefully you guys can let me know if I’m on the right path or if I’m still misunderstanding it. I think that leverage doesn’t matter when performing these calculations. Leverage only affects the cost you will pay for each of the lot sizes (Higher Leverage = Lower Lot Cost).

Here are some things we already know:

Lot Sizes

  • Standard - 1 (100,000 units)
  • Mini - 0.1 (10,000 units)
  • Micro - 0.01 (1,000 units)

Formulas

  • Pip Value = Lots x 10
  • Risk = SL_Pips x Lots x 10
  • Lot Size = Risk/ (SL_Pips x 10)

Broker & Leverage

I live in the US, let’s assume I would use a US broker.

OANDA = 1:50 leverage

Currency Pair

EURUSD = $1.18453 (As of 10/19/17 - 8:51 AM EST)

This would mean that with a 1:50 leverage I need to supply at least 2% (50/1).

1 Lot EURUSD = $118,453 Leverage = 1:50 (2%) Margin Required = $2,369.06
1 Mini EURUSD = $11,845.3 Leverage = 1:50 (2%) Margin Required = $236.90
1 Micro EURUSD = $1,184.53 Leverage = 1:50 (2%) Margin Required = $23.69

Calculating Risk & Lot Size

Account Balance: $3,000 (USD)

Let’s say I want to risk 5% of my account balance this would be $150 (USD) = (3000 * 0.05). To calculate the number of lots to purchase or my position size I also need to know the stop loss in pips. Let’s say I want a stop loss of 50 pips. We can plug in the amount of money we want to risk and the stop loss in pips to get our position size.

Lot Size (Position) = Risk / (StopLoss * 10)
Lot Size (Position) = 150 / (50 * 10)
Lot Size (Position) = 150 / 500
Lot Size (Position) = 0.3

This means that we can now calculate our pip value

Pip Value = Lots x 10
Pip Value = 0.3 x 10
Pip Value = $3/pip

If we take our pip value and multiply it by our 50 pip stop loss, you can see it comes out to $150. The max I wanted to risk.

But in order to buy a lot size of 0.3, which is equal to 3 mini lots or 30,000 units I’d have to put up $710.70 assuming my leverage is 1:50.

Does this all sound correct?

3 Likes
3

Hi there,

I’ve recently finished the BabyPips course and was wondering if I could contribute to the forums.

The lot size calculation is right, just FYI BabyPips provides a nifty calculator if you wanted to verify what lot size you need.

https://www.babypips.com/tools/position-size-calculator

Your pip value is also right, I’ve verified it using BabyPips Pip Value Calculator.

https://www.babypips.com/tools/pip-value-calculator

This last bit however might need some confirmation. Your used margin would definitely be 710.70 USD ( 3 x 236.90 ) but that is the absolute minimum you would need for 3 mini lot positions.

Your true leverage is 10:1 since you have 3,000 USD holding 30,000 USD worth of betting power ( or 11.8:1 if you want to be super accurate)

4

Hi,

If you’re new and wanting to trade EURUSD on 50 pip stop, you’ll need a super accurate entry postition. Half position size and double stop to 100 is my suggestion. Even then you’ll need good entries.

5

Your sums are right, but I hope you’ll quickly change your mind about your risk management.

I’d never go above 1% risk per trade (0.5% is better), at least until you’ve done hundreds of trades with proved long-term profit and minimal drawdowns.

5% risk per trade will probably make it impossible for you to succeed, and is a very common reason for people not succeeding.

2 Likes
6

Definitely agree with this, from what I can see, it’s not uncommon to have 10-20 losing streaks and betting 5% risk for every trade makes it really hard to get back to your original balance.

The general consensus for risk per trade seems to be between 0.5 - 2.0%.

1 Like
7

Hello Fernan, thank you for your reply. I guess this is where I still don’t understand leverage. A lot size of 0.3 (30,000 units) at EURUSD 1.18453 = $35,535.90. If we take 2% which is the required minimum margin for a leverage of 1:50 we get $710.71 So how would the leverage only be 1:10?

Hi LukasVisser,

I definitely still have a lot to learn about money management techniques for sure, but I wouldn’t risk 5%. I was just using a higher number for the example to amplify the numbers a bit to help in my understanding of leverage and the formulas.

I appreciate both of your guys input. Thank you!

1 Like
8

The 10:1 leverage I am referring to is the true leverage, which is different from maximum leverage.

True leverage is calculated by the number of units you are trading divided by the balance you have on your account.

So in this case 30,000 / 3,000 = 10:1

Maximum leverage is different, it’s defined by the minimum margin required to open a position with a broker, in this case 2% margin or 50:1

So in this case, 30,000 * 0.02 = 600 margin required

I learned a lot by completing the BabyPips course, I’m linking the lesson below which I used to familiarise myself with leverage (with examples too), hope this helps you

1 Like
9

That makes sense. Thank you @fernan

10

Omg thank you! Still helpful 3 years later.