Dumb question - position size bigger than balance?

Beginner Questions
1

Hi there,

This will be an absolute dumb question, I hope you are all ready for this.

I’ve opened a demo account on started monitoring live markets yesterday. I found a long trade on GBPUSD that I want to enter. Here are my calculations:

Initial balance: 1000 USD
Risk per trade 1%
Stop loss size = 16 pips

First I get my risk per trade: 1000 * 0.01 = 10 USD
Then I get my value per pip = 10 / 16 = 0.625 USD/pip
Then I get my position size = 0.625 * (10,000/1) = 6,250 units GBPUSD

So the calculation is telling me I should buy 6,250 units GBPUSD to be on my comfortable risk level, but as you can see the units is higher than my account balance? Did I miscalculate somewhere?

Thanks in advance

2

That’s the purpose of leverage.

1 Like
3

Hi,

Thanks for the quick reply.

So I need to lever my account 6.25 to 1 in order to get the position size with my risk comfort level?

What if I don’t want to use leverage? Do I just increase my stop loss size?

Sorry, just terribly confused at the moment.

Thanks,

4

Hi @fernan

Based on the fact that you want to risk 1% of your balance on this trade ($10), and that you want this $10 to equal 16 pips, you have approximated the trade size correctly.

That depends on what’s most important to you. You are right to be cautious when it comes to leverage.

The leveraged nature of forex trading means that any market movement will have an equally proportional effect on your deposited funds. This may work against you as well as for you. The possibility exists that you could sustain a total loss of initial margin funds and be required to deposit additional funds to maintain your position. If you fail to meet any margin requirement, your position may be liquidated and you will be responsible for any resulting losses.

That said, increasing your stop loss size from 16 up to 100 pips changes the nature of this trade considerably from a scalp to more of a swing trade. What made you choose the 16 pip stop loss in the first place?

1 Like
5

Hi,

Thank you for the lengthy response,

I’ve recently finished the BP course and after adapting the Cowabunga System (BP trading system) I entered a demo trade yesterday and earned some pips.

As part of my retrospective analysis, I saw that I may have set my stops too wide and as a result, my TP area is very high, and I’m thinking this might be bad if i see a better setup somewhere else but my funds are frozen in this trade.

So my solution to this is obviously to decrease my pip stop to 16, which now i think may be too narrow.

6

Hi @fernan

Instead of reducing the number pips you are risking with your stop loss (which changes the nature of your trade), consider reducing your trade size, so you are risking less money per pip. That way you can risk the same amount of money as you originally intended without changing the nature of your trade in terms of pips.