Help me out with position sizing and risk per trade calculation

Beginner Questions
1

Good day ! Fellow traders

I’m fairly new trader. I trade a small account of 80$ with a leverage of 1:20. Currently my account is down at 79,90$. Normally I would only trade 5-10units maximum. Even though I can trade up to 1500-1900units depending on which currency.

So when I usually open a position of let’s say EURUSD 5units long. Margin used is calculated around 0,46$ and I put my SL around 0,01$ and TP at 0,02$. Now here’s what’s confusing me. I’ve been trying to risk as little as I can on each trade possibly 1% of my account. According to my current account balance 1% would be 0,799$. When a trade goes against me and hits SL I loose 0,01$ so I’m thinking I risk way below 0.799$ that is not even 1% on each trade. But I also have margin used ? What is that about. And the leverage part confuses me as well. If I had 1:1 or no leverage then with an account of 79,90$ I wouldn’t be able to trade up to 1900 units meaning I would be trading a lot less lots but with same risk 1% of whole account per trade. If I’m getting it right up until now. Then wouldn’t it be better to have some leverage ? After all as long as you risk 1% per trade even if you have a bit of leverage it won’t do any harm ?

Any input will be greatly appreciated !
Thanks again !

2

This might help
Forex Money Management

3

Hello, rookie

Let me answer your last question first. Yes, it’s greatly to your advantage to have leverage [I]available[/I] in your account. In fact, the more leverage available to you, the better — because [I]high available leverage corresponds to low required margin.[/I]

The leverage available to you from your broker is often called [I]maximum allowable leverage,[/I] or [I]broker leverage,[/I] or simply [I]account leverage.[/I] And I’m guessing that this is the “type” of leverage you are referrring to, when you say that you are “trading with 20:1 leverage”.

If your account allows you to use [I]up to[/I] 20:1 leverage, then your trading platform is automatically setting aside 5% of the notional value of each trade as margin (because 1 ÷ 20 = 0.05 = 5%).

Here’s how that works: Let’s say that your account is denominated in USD, and you enter a 100-unit trade in GBP/JPY. The notional value of your trade will be the USD-value of 100 GBP. Suppose the price of GBP/USD is 1.6760 at the time your trade is entered. This means that £1 = $1.676 (note that I’m showing this price using a decimal point where you would use a comma). If £1 = $1.676, then £100 (which is the notional value of your trade) = $167.60. And the required 5% margin would be $8.38.

Caution: Check with your broker to find out exactly how he calculates margins. Many brokers establish “price bands”, such that the margin required for a particular size position, in a particular pair, will be constant as long as the price of that pair stays between certain upper and lower limits. If your broker does that, then the actual margin required on a particular trade will be [I]approximately[/I] 5% of the notional value of the trade.

Let’s assume that the margin in the case of the GBP/JPY trade in the example above is exactly 5%, equal to $8.38. As soon as your 100-unit trade is entered, your platform will automatically designate $8.38 as margin, and this sum will be [I]unavailable[/I] to you for covering losses, or for withdrawal.

Some, or all, of the remaining $71.52 in your account ($79.90 - $8.38) will be at risk for the duration of your trade, depending on where you place your stop-loss.

Let’s say that you place a stop-loss 30 pips away from your entry price. (Note that the 30 pips you are risking includes the spread on your GBP/JPY trade.) And let’s say that 1 pip is worth $0.01 (1 cent). If your stop-loss is hit, then you will suffer a loss of 30 pips, which equates to a monetary loss of $0.30. This amount is quite a bit less than 1% of your account balance. So, let’s find out how large your GBP/JPY position should be, such that your 30-pip stop-loss puts 1% of your account at risk.

You could calculate your position size by hand, but it’s much easier to use a Position Size Calculator, such as this one.

For the GBP/JPY trade in the example above, you would use the drop-down menus to select USD for your account currency, and GBP/JPY for your pair; and you would enter 79.90 for the account balance, 1 for the risk percentage, and 30 for the stop-loss. Note that the Calculator then asks you for the current price of the USD/JPY (because your account is denominated in USD, and your pair is priced in JPY).

I entered these numbers into the Calculator (using a price of 101.80 for the USD/JPY), and got the result:

Your position size in this trade should be [B]271 units,[/B] in order to make the 30-pip stop-loss assumed in the example correspond to a [B]1% account risk.[/B]

Play around with the Position Size Calculator, using different pairs, and various stop-loss figures, to see how it works and to get comfortable with it. It’s a handy tool.

4

[QUOTE=“Clint;632515”]Hello, rookie Let me answer your last question first. Yes, it’s greatly to your advantage to have leverage available in your account. In fact, the more leverage available to you, the better — because high available leverage corresponds to low required margin. The leverage available to you from your broker is often called maximum allowable leverage, or broker leverage, or simply account leverage. And I’m guessing that this is the “type” of leverage you are referrring to, when you say that you are “trading with 20:1 leverage”. If your account allows you to use up to 20:1 leverage, then your trading platform is automatically setting aside 5% of the notional value of each trade as margin (because 1 ÷ 20 = 0.05 = 5%). Here’s how that works: Let’s say that your account is denominated in USD, and you enter a 100-unit trade in GBP/JPY. The notional value of your trade will be the USD-value of 100 GBP. Suppose the price of GBP/USD is 1.6760 at the time your trade is entered. This means that £1 = $1.676 (note that I’m showing this price using a decimal point where you would use a comma). If £1 = $1.676, then £100 (which is the notional value of your trade) = $167.60. And the required 5% margin would be $8.38. Caution: Check with your broker to find out exactly how he calculates margins. Many brokers establish “price bands”, such that the margin required for a particular size position, in a particular pair, will be constant as long as the price of that pair stays between certain upper and lower limits. If your broker does that, then the actual margin required on a particular trade will be approximately 5% of the notional value of the trade. Let’s assume that the margin in the case of the GBP/JPY trade in the example above is exactly 5%, equal to $8.38. As soon as your 100-unit trade is entered, your platform will automatically designate $8.38 as margin, and this sum will be unavailable to you for covering losses, or for withdrawal. Some, or all, of the remaining $71.52 in your account ($79.90 - $8.38) will be at risk for the duration of your trade, depending on where you place your stop-loss. Let’s say that you place a stop-loss 30 pips away from your entry price. (Note that the 30 pips you are risking includes the spread on your GBP/JPY trade.) And let’s say that 1 pip is worth $0.01 (1 cent). If your stop-loss is hit, then you will suffer a loss of 30 pips, which equates to a monetary loss of $0.30. This amount is quite a bit less than 1% of your account balance. So, let’s find out how large your GBP/JPY position should be, such that your 30-pip stop-loss puts 1% of your account at risk. You could calculate your position size by hand, but it’s much easier to use a Position Size Calculator, such as this one. For the GBP/JPY trade in the example above, you would use the drop-down menus to select USD for your account currency, and GBP/JPY for your pair; and you would enter 79.90 for the account balance, 1 for the risk percentage, and 30 for the stop-loss. Note that the Calculator then asks you for the current price of the USD/JPY (because your account is denominated in USD, and your pair is priced in JPY). I entered these numbers into the Calculator (using a price of 101.80 for the USD/JPY), and got the result: Your position size in this trade should be 271 units, in order to make the 30-pip stop-loss assumed in the example correspond to a 1% account risk. Play around with the Position Size Calculator, using different pairs, and various stop-loss figures, to see how it works and to get comfortable with it. It’s a handy tool.[/QUOTE]

Thanks Clint !! Your response was very helpful ! I appreciate that you took the time to write long and in depth response. About the position size calculator shouldn’t there be a leverage option ? I trade with 1:20 and that I believe allows me to trade bigger lots with less margin. Besides that I think I generally got the idea.

5

I’ve actually found another thread that answers my question. Coincidently it was answered by Clint. Thanks a lot again. That cleared a lot of confusion. I’ve been wanting to trade bigger lots but still wanted to stay within my means :D. Thought I was being very cautious well it’s about time.

One more thing to clarify :smiley: lets say I open a position of 100units and my account balance is 79.90$ I see that you mentioned a real leverage and it is different on each trade and essentially that depends on your account balance and your position on that trade. If that’s the case in this case to calculate my real leverage 100units : 79.90 = 1.25 ish so in conclusion 1:1.25 would be my real leverage. Is that correct ?

6

Hello again, rookie

I’m glad that you’re starting to understand these concepts. But, I believe that you’re still confused about leverage.

Regarding your two previous replies, you said that you still think leverage should be factored into the calculations made by the Position Size Calculator. That’s wrong. Let’s try to unravel why it’s wrong.

When people talk about leverage, we can’t know for sure [I]which type of leverage[/I] they are talking about, unless they tell us directly. There are two types of leverage:

B Maximum allowable leverage[/B] — this is the leverage [I]limit[/I] offered to you by your broker. This is the type of leverage I was describing in my previous reply to you. In your case, this maximum allowable leverage is 20:1. That is probably the most that your broker is allowed to offer to you, under Thai law. (In other parts of the world, the legal limit is different).

Maximum allowable leverage (also called available leverage, broker leverage, or account leverage) is [I]the most leverage[/I] you can use at any one time — it’s a [I]limit.[/I] But, you don’t have to use that much leverage, and sensible money management says that you shouldn’t use that much leverage.

Maximum allowable leverage determines the [I]percentage of margin[/I] that will be required on every trade. There is a fixed mathematical relationship between leverage and required margin at most brokers, and it’s this:

[B]1÷ Maximum allowable leverage = Required margin percentage[/B]

That’s where the 5% margin figure came from in the example I gave you previously. Here are some other leverage/margin combinations:

In the U.S., the legal limit on forex leverage is 50:1. This corresponds to 2% required margin.

In many other countries, the legal limit on forex leverage is much higher. For example, 100:1 maximum allowable leverage corresponds to 1% required margin, and 500:1 maximum allowable leverage corresponds to 1/5 of 1% required margin. And so forth.

Generally, maximum allowable leverage never changes. Once it’s established by your broker, operating within the laws of your country, it’s fixed. The maximum allowable leverage on your account [I]will always be 20:1,[/I] and the margin required on every one of your trades [I]will always be 5%[/I] of the notional value of each trade, no matter how large or small your positions might be (up to the 20:1 leverage limit on your account).

B Actual leverage used[/B] — this is the leverage you actually use in a particular trade, based on the position size which you have established. This actual leverage can vary from one trade to the next, depending on how large you choose to make each position.

In the 100-unit GBP/JPY example in my previous reply, the notional value of the trade was $167.60. If you placed that trade, you would be entering into a transaction worth $167.60 using an account that only has $79.90 in it. How it that possible? By using leverage. How much leverage did you use? Your $167.60 position is 2.1 times as large as your account balance — therefore, you are actually using [I]2.1:1 leverage.[/I]

If you placed the trade that I calculated using the Position Size Calculator, your position would be 271 units of GBP/JPY, with a notional value of $454.20 (at a GBP/USD price of 1.6760, as in the previous example). In this case, your $454.20 position would be 5.68 times as large as your $79.90 account balance — therefore, you would actually be using [I]5.68:1 actual leverage.[/I]

In both cases, your account leverage (maximum allowable leverage) remained the same — 20:1. And in both cases, the [I]margin percentage[/I] required on your trades remained the same — 5%. But, the [I]margin amounts[/I] would be different in these two trades, because 5% of $167.60 is not the same as 5% of $454.20.

[B]Notice that actual leverage and position size depend on each other.[/B]

[I]In each of your trades, you could calculate position size based on risk percentage,[/I] as was done in the GBP/JPY example, and this would determine the actual leverage used in each case. This actual leverage would vary from one trade to the next, along with the other metrics of your trades.

[I]Or, you could choose to use the same amount of actual leverage — say, 5:1 — on every trade,[/I] and that would determine your position size in each case. But, doing it this way, your actual percentage risk would vary from one trade to the next, along with the other metrics of your trades.

Most traders believe [B]it’s better to hold risk percentage to a desired figure,[/B] and let actual leverage vary — rather than holding actual leverage to a desired figure, with the result that risk percentage varies.

I hope this helps to clear up your confusion regarding leverage, margin and position size.

7

[QUOTE=“Clint;632656”]Hello again, rookie I’m glad that you’re starting to understand these concepts. But, I believe that you’re still confused about leverage. Regarding your two previous replies, you said that you still think leverage should be factored into the calculations made by the Position Size Calculator. That’s wrong. Let’s try to unravel why it’s wrong. When people talk about leverage, we can’t know for sure which type of leverage they are talking about, unless they tell us directly. There are two types of leverage: (1) Maximum allowable leverage — this is the leverage limit offered to you by your broker. This is the type of leverage I was describing in my previous reply to you. In your case, this maximum allowable leverage is 20:1. That is probably the most that your broker is allowed to offer to you, under Thai law. (In other parts of the world, the legal limit is different). Maximum allowable leverage (also called available leverage, broker leverage, or account leverage) is the most leverage you can use at any one time — it’s a limit. But, you don’t have to use that much leverage, and sensible money management says that you shouldn’t use that much leverage. Maximum allowable leverage determines the percentage of margin that will be required on every trade. There is a fixed mathematical relationship between leverage and required margin at most brokers, and it’s this: 1÷ Maximum allowable leverage = Required margin percentage That’s where the 5% margin figure came from in the example I gave you previously. Here are some other leverage/margin combinations: In the U.S., the legal limit on forex leverage is 50:1. This corresponds to 2% required margin. In many other countries, the legal limit on forex leverage is much higher. For example, 100:1 maximum allowable leverage corresponds to 1% required margin, and 500:1 maximum allowable leverage corresponds to 1/5 of 1% required margin. And so forth. Generally, maximum allowable leverage never changes. Once it’s established by your broker, operating within the laws of your country, it’s fixed. The maximum allowable leverage on your account will always be 20:1, and the margin required on every one of your trades will always be 5% of the notional value of each trade, no matter how large or small your positions might be (up to the 20:1 leverage limit on your account). (2) Actual leverage used — this is the leverage you actually use in a particular trade, based on the position size which you have established. This actual leverage can vary from one trade to the next, depending on how large you choose to make each position. In the 100-unit GBP/JPY example in my previous reply, the notional value of the trade was $167.60. If you placed that trade, you would be entering into a transaction worth $167.60 using an account that only has $79.90 in it. How it that possible? By using leverage. How much leverage did you use? Your $167.60 position is 2.1 times as large as your account balance — therefore, you are actually using 2.1:1 leverage. If you placed the trade that I calculated using the Position Size Calculator, your position would be 271 units of GBP/JPY, with a notional value of $454.20 (at a GBP/USD price of 1.6760, as in the previous example). In this case, your $454.20 position would be 5.68 times as large as your $79.90 account balance — therefore, you would actually be using 5.68:1 actual leverage. In both cases, your account leverage (maximum allowable leverage) remained the same — 20:1. And in both cases, the margin percentage required on your trades remained the same — 5%. But, the margin amounts would be different in these two trades, because 5% of $167.60 is not the same as 5% of $454.20. Notice that actual leverage and position size depend on each other. In each of your trades, you could calculate position size based on risk percentage, as was done in the GBP/JPY example, and this would determine the actual leverage used in each case. This actual leverage would vary from one trade to the next, along with the other metrics of your trades. Or, you could choose to use the same amount of actual leverage — say, 5:1 — on every trade, and that would determine your position size in each case. But, doing it this way, your actual percentage risk would vary from one trade to the next, along with the other metrics of your trades. Most traders believe it’s better to hold risk percentage to a desired figure, and let actual leverage vary — rather than holding actual leverage to a desired figure, with the result that risk percentage varies. I hope this helps to clear up your confusion regarding leverage, margin and position size.[/QUOTE]

That was the most elaborative response that I’ve ever had on this forum. I had to read that couple of times to really absorb and I think this time around I think I actually got it. The maximum leverage that my broker /oanda Singapore/ allows is I believe upto 1:50 or 1:100.

It’s funny how I’ve transitioned into live account without knowing all these. Well I only vaguely knew about it didn’t think it held that much of an importance. But now that I’ve learned to crawl and started walking /of course I’m falling here and there it’s not always a smooth walk/ I felt the need to learn all these and eventually hopefully I’ll start running. Thanks again Clint!! :smiley: