Forex Calculations - Please correct me if I am wrong

Trading Discussion
1

Hello Experts !

Please correct me if I am wrong as I have some doubts regarding forex mathematics.

Account Size------------------: $5,000
Risk % Per Trade -------------: 4%
Trading Amount – -----------: $200 ($5,000 x 4%)
Leverage I am using-----------: 400
Leveraged Trading Amount-----: $80,000

[B][U]Questions[/U][/B]

Now according to above computations, should $80,000 be my lot size given the risk parameters (4% per trade) and leverage I am using ?

I am using this calculator also, but this is giving me different result as to position size:

Position Size Calculator, Forex Position Size Calculator

Its giving 2,000,000 units.

Please correct me where I am wrong :15:.

Thank you for your kind help.

2

You’ve missed out a key factor: your stop-loss! Your position size is dependent on the amount you want to risk & the amount of pips in your stop-loss.

The position size calculator is so that you buy the correct position size to ensure that your stop-loss in pips is equal to the amount that you are risking (don’t get greedy too, position size should be rounded down).

If not you will either be under exposed & limit your earnings or over-exposed to the market & run the risk of losing more mon£y than you planned (from your question, the later is more likely).

So the purpose of the position size is to ensure that your stop-loss=risk.
So if your risk is 4% ($200) & your stop-loss is 100-pips then the position size calculator will tell you the size to buy that makes 100-pips=$200.

I hope that this helps!

3

Hi !

Thank you for your kind reply Baz. :slight_smile:

Ok, so lets assume, if I have $5,000 in my account and want to risk 4% ($200) per trade and the leverage I am using for the same trade is 400, and the stop-loss I am using is 20 pips. The position size calculator shows that my position size should be 100,000 units (1 lot).

Now if I hit the stop-loss (20 pips), what is the maximum amount I will lose (because I am also using leverage so a bit confused as to the amount lost) and what will be my account balance after the loss ?

Thanks for your time and consideration. :slight_smile:

Kind Regards,

Shawn

4

Forget about the leverage. That only defines how big a position you can enter and your margin requirement. It’s the actual size of the position you put on that defines the $ risk (and return) of your trade.

5

See the above, Rhodytrader is right. Your leverage will determine the maximum amount of mon£y that you have access to as we’ll as how much of your equity they put aside to secure against your trade.

It doesn’t effect your position size - hence why the Position Size Calculator does not ask about your leverage rate.

6

Thank you Rhody and Baz. I got the point now. :slight_smile:

Thanks for your kind replies.

7

So I’ll summarise the forex mathematics once more to make sure I am correct:

After having decided (as part of trading plan) to buy EUR/USD, the first thing a trader should do is to calculate the position size which is based on the following:

[B][U](Account currency is USD)[/U][/B]
Account size: $5,000
Risk % Per Trade: 4%
Stop loss: 20 pips

The position size calculator shows 100,000 units.

The second thing now is to calculate the margin.

Pair: EUR/USD
Current price: 1.3000 (hypothetical)
Leverage: 50:1
No. of units: 100,000 (from above calculation no. 1)

The margin calculator shows that the margin required for this trade should be: $2,600

Total margin I have (available margin) (based on leverage of 50) is [B][U]Account Size x Leverage ($5,000 x 50)[/U][/B]. ($250,000)
Margin required for the trade is 2,600.
Margin used is 2600/250000 = 1.04%.

Am I correct now ? And is the margin used and available (98.96%) is sufficient to have for fighting with the fluctuations because I plan to close my trade in a short period of time ?

Thank you.

Kind Regards,

Shawn.

8

I’m still a newbie & that’s beyond me now but I can following your workings, you would appear to be correct - or at least you’re correct in theory (don’t take my word on that though).

Risking only a small percentage of your equity means that a margin call is pretty unlikely so I personally don’t normally pay much attention to the used/free margin. It would only be an issue if you we’re trading other pairs as well & had multiple 4% trades open.

Sorry I couldn’t be of much use Shawn.

9

That is absolutely fine Baz. I thank you from the bottom of my heart for taking time to reply. :slight_smile:

May God give you the desire of your heart and make all your plans succeed.

Have a nice day !!! :slight_smile:

10

You are more than welcome!

I wish all my posts were followed up with such gratitude.

I’m just glad that I could answer your initial question & I’m sure that you would be just as helpful if I had a question that you could help with.

Enjoy your w/end Shawn!

11

Hi Baz !

Thanks for the wishes. Here at my place, there are 18 holidays because of Eid starting from today. And weekend is Thursday and Friday. :slight_smile:

Regards,

Shawn

12

The last bit is incorrect. You’re mixing terms. The $2600 relates to the money in your account, not the the amount of leverage available. You either want 2600/5000 or 130,000/250,000. Both ratios work out the same, you’ll notice.

13

Hi Rhody !

Thanks for your kind help, as you are the only main contributor who helps me a lot :slight_smile:

Ok, so I’ll repeat the same thing again with some additions of what you said above.

So I’ll summarise the forex mathematics once more to make sure I am correct:

After having decided (as part of trading plan) to buy EUR/USD, the first thing a trader should do is to calculate the position size which is based on the following:

(Account currency is USD)
Account size: $5,000
Risk % Per Trade: 4%
Stop loss: 20 pips

The position size calculator shows 100,000 units.

The second thing now is to calculate the margin.

Pair: EUR/USD
Current price: 1.3000 (hypothetical)
Leverage: 50:1
No. of units: 100,000 (from above calculation no. 1)

The margin calculator shows that the margin required for this trade should be: $2,600

OK, so you said that this $2,600 relates to the money in my account. So total I have is 5,000 and margin required is 2,600 [(good faith deposit) I was confusing it with leverage] for this particular trade.

Thats mean I can still open another position, because I have free margin (usable margin) of 2,400 (5000 - 2600) ?

Another follow up question is how much leverage I have (in USD) with 5,000.

Thank you for your kind help. :slight_smile:

14

Yes

Another follow up question is how much leverage I have (in USD) with 5,000.

Your leverage is based on what your broker allows. If you’re in the US then it’s capped at 50:1, which means you could put on a total of $250,000 in positions.

15

Thanks for your reply Rhody.

I got all my answers confirmed from you. :slight_smile:

I also noticed that as compared to EUR/USD, USD/JPY has low required margin given all other trade parameters are same (same account size, risk %, stop loss, etc.)

Many many thanks :slight_smile:

16

You have to keep in mind that the trade size is denominated in the base currency, so a standard lot (for example) of EUR/USD is 100,000 EUR and a standard lot of USD/JPY is 100,000. Because EUR/USD is above 1.00, the value of a standard lot of EUR/USD is higher than one of USD/JPY. That’s why the margin requirement is lower.