Clarification on lot size calculations

Beginner Questions
1

Hi, I’m having a difficult time understanding how lot sizes should be calculated for different currency pairs. I read the course on ‘position sizing’, but its still not clear to me. I wrote some simple examples of how i think it works, if someone who understands this well could have a look and tell me if they’re right, or where I went wrong, it would be greatly appreciated. Note that I’m not using a stop loss in the calculation, I know its very important to use when doing real trading, but I was trying to understand the calculation without it right now.

If I have a 10000USD account (50:1), and I want to use 13% to buy the EURUSD pair, then this is how many lot units I can get:
EURUSD rate: 1.14143
riskFunds = 10000 * 0.13 = 1300 * 50 = 65000USD
Since Im buying the EUR, I need to convert 65000 to EUR, which is 65000 / 1.14143 = 56946EUR
Therefore i can obtain 55965 lot units with my 1300USD margin

If I have a 10000USD account (50:1), and I want to use 13% to buy the USDJPY pair, then this is how many lot units I can get:
USDJPY rate: 109.960
riskFunds = 10000 * 0.13 = 1300 * 50 = 65000USD
Since Im buying the USD, I dont need to convert anything since my account is in USD.
Therefore i can obtain 65000 lot units with my 1300USD margin

If I have a 10000USD account (50:1), and I want to use 13% to buy the EURGBP pair, then this is how many lot units I can get:
EURGBP rate: 0.8786
riskFunds = 10000 * 0.13 = 1300 * 50 = 65000USD
Since Im buying the EUR, I need to convert 65000 to EUR, which is 65000 / 1.14143 = 56946EUR
Therefore i can obtain 55965 lot units with my 1300USD margin

Thank you

2

Position-sizing is a risk-management tool.

You have not defined your risk in any of your examples. Therefore, the “position size” results you have calculated bear no relationship to risk management.

The term “risk funds”, which you have used in each example, is a made-up term which has no meaning.

Furthermore, the calculation in which you multiply –

your account balance x your 13% figure x your broker’s maximum allowable leverage

— has no meaning. It produces a mathematical result – 56946 EUR – which is simply a number pulled out of the air.

The only useful fact which can be gleaned from that calculation is that you have arbitrarily set the actual leverage you will use in this trade at 6.5:1 (65000 USD notional value / 10000 USD account balance).

You could have arbitrarily chosen this actual leverage, or any other actual leverage figure, without doing any math. But, any position size selected in this way fails to relate to risk management, and therefore is nothing more than a random number.

The whole point of position-sizing is to establish the size of your trade such that, if things go wrong, the resulting loss in your account will be limited to a pre-determined, acceptable amount.

This is possible only if you define in advance what that pre-determined, acceptable amount will be. That’s where your intended stop-loss enters the equation. And that’s why every Position Size Calculator – including THE ONE BUILT INTO THIS WEBSITE – will ask you for your stop-loss (in pips), along with other vital information.

Leaving your stop-loss out of the equation nullifies the entire position-size calculation.

1 Like
3

After more searching, I found the answer I was looking for on this site, in a post by you a few years ago.

Thanks for the help.