Hello, strontiumDog
Sorry you had to wait so long for a reply.
You’ve gotten bogged down in the arithmetic. That’s not unusual — the arithmetic is tedious and boring. People who actually trade forex don’t do these tedious arithmetic calculations. In a moment, I’ll show you what we do instead.
The [I]School[/I] presents all those tedious calculations so that you will understand the theory that goes into connecting the question to the answer.
Basically, there are three questions:
B[/B] If my account currency is XXX, and I want to trade the AAA/XXX pair, how do I figure my position size?
(Example: My account currency is GBP, and I want to trade EUR/GBP.)
B[/B] If my account currency is XXX, and I want to trade the XXX/BBB pair, how do I figure my position size?
(Example: My account currency is GBP, and I want to trade GBP/JPY.)
B[/B] If my account currency is XXX, and I want to trade the AAA/BBB pair, how do I figure my position size?
(Example: My account currency is GBP, and I want to trade EUR/JPY.)
The first question is relatively easy to answer. The second question is trickier. And the third is even worse.
Note that the three examples above cover all the possibilities. My account currency might match the base currency in the pair I want to trade; it might match the cross-currency; or it might match neither one. There are no other possibilities.
In your post, you gave the “Newbie Ned” example, which obviously corresponds to B[/B] above. That is, Ned’s account currency does not match either the base currency, or the cross-currency, of the pair he wants to trade.
Then, you got confused about applying this example to [I]your[/I] account, which you said is denominated in GBP.
Here’s where I got confused: I’m not sure which of the three cases — B, (2),[/B] or B[/B] — you are hung up on. In other words, when you posted…
…what pair are you trading in your GBP-denominated account?
While I await your clarification to the above, let me point out a couple of things.
I said at the top that real traders don’t do all this arithmetic, in order to establish a position size. Instead, we use one of the following methods:
• If we really want to conform to a specific risk factor (say, 1% of account balance), we will simply plug the necessary numbers into a [B]Position Size Calculator,[/B] such as this one, and let the app do the arithmetic.
Try it. Take one of the “Ned” examples from the [I]Schoo[/I]l lesson, and plug the relevant numbers into the Calculator. If you do it correctly, you will get the same result that the [I]School[/I] lesson calculated, in about one-tenth the time.
• Those of us who aren’t hung up on a hard-and-fast risk factor (like the 1% example, above), but instead are content with anything in a reasonable range (say, a 1% to 2% range) — [B]we might simply use the same stop-loss[/B] (risk measured in pips) [B]and the same position size[/B] (say, one mini-lot, or one standard lot) [B]for all trades, regardless of the currency pair involved.[/B] For those of us who are really lazy, this method allows us to slap a position on, when we see a promising set-up, without calculating anything.
Here are some examples: Let’s say that I’m content with risk in the 1%-2% range, and let’s say that I have 10,000 USD in my account. Finally, over some period of time, let’s say that I place trades in the following pairs — USD/JPY, GBP/USD, EUR/JPY, GBP/AUD, USD/CAD, EUR/CHF, and NZD/JPY — and let’s say that every trade is automatically 15 micro-lots (15,000 units of base currency), with a 100-pip stop-loss. How much risk would I be taking in each of these trades?
If you do the math by hand, you will calculate the following risk factors:
USD/JPY trade — slightly less than 1.5% risk (based on current price of USD/JPY = 101.989)
GBP/USD trade — exactly 1.5% risk (GBP/USD price does not matter)
EUR/JPY trade — slightly less than 1.5% risk (the same for all yen-pairs)
GBP/AUD trade — slightly less than 1.4% risk (based on current price of AUD/USD = 0.92719)
USD/CAD trade — slightly less than 1.4% risk (based on current price of USD/CAD = 1.09709)
EUR/CHF trade — about 1.66% risk (based on current price of USD/CHF = 0.90517)
NZD/JPY trade — slightly less than 1.5% risk (the same for all yen-pairs)
So, if I know that my account balance is roughly $10,000 (say, $10,000 ± 10%), and I use the same trade metrics on every trade (15,000 units of base currency, and 100-pip SL), then for any pair that I choose to trade, I know that my risk factor will be in the 1% to 2% range. And being supremely lazy, I can forget about calculating the picky details.
Why does this work? It works because [B]non-yen currency pairs[/B] almost always stay in a price range of about 0.8000 to 1.8000. And [B]yen-pairs[/B] almost always stay in a price range of about 80.00 to 180.00. As long as that’s the case — and, as long as my account balance stays in a fairly tight range — the lazy man’s method of position-sizing works fine.
What would happen if my account balance changed significantly? I would simply adjust my typical (lazy-man’s) position size in proportion to the change in my account balance. If my balance grew by 25%, I would consider increasing my typical position size by 25%. And, if my balance dropped by x%, I would consider reducing my typical position size by x%. In most cases, I would be able to figure these percentage changes in my head, without the need for tedious calculations.
Correct, there are no pairs with EUR as the cross currency. In the forex market, only “normal” pairs, determined according to a specific hierarchy, are traded. (More on that in a moment).
But, you can always do calculations involving an “inverted” pair, if there’s a reason to do so. As an example, if EUR/USD = 1.34078, then mathematically USD/EUR = 1 ÷ EUR/USD = 0.74583 (even though there is no such pair as USD/EUR traded in the market).
By international agreement, “normal” currency pairs are determined by the following hierarchy: EUR, GBP, AUD, NZD, USD, CAD, CHF, JPY, … etc, and on down through the list of minor and exotic currencies.
Here’s how this hierarchy is applied:
• the EUR is the base currency in all EUR-pairs
• the GBP is the base currency in all GBP-pairs, except EUR/GBP
• the AUD is the base currency in all AUD-pairs, except EUR/AUD and GBP/AUD
• the NZD is the base currency in all NZD-pairs, except EUR/NZD, GBP/NZD and AUD/NZD
• the USD is the base currency in all USD-pairs, except EUR/USD, GBP/USD, AUD/USD and NZD/USD
…etc.