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?