Hi all,
Suppose I have 500 CAD. How much lots of AUDUSD can I trade?
We suppose that 100% of money is being risked.
What’s weird, is that when I try to calculate the lot size I can trade, the calculators don’t ask for my leverage.
Also, could you please show me how to calculate it? I looked at the explainations on other websites, but they aren’t exactly noob-friendly.
Thanks!
Wllen1
The maximum I[/I] number of lots depends on the MARGIN required per lot.
Let’s assume that your broker offers you 50:1 maximum allowable leverage, which corresponds to required margin of 2% of the notional value of your trade; and, just to use round numbers, let’s say that this works out to CA$2000 per standard lot, CA$200 per mini-lot, and CA$20 per micro-lot. And let’s assume that you’re trading micro-lots.
The [I]approximate[/I] answer to your question is: CA$500 ÷ CA$20 = 25 micro-lots. However, this result does not take account of the initial “loss” which your position will incur due to the spread. If the “maintenance margin” on your account is the same as the “initial margin”, then as soon as you open a 25-micro-lot position in AUD/USD, your “available margin” will be zero, and you will get a MARGIN CALL, automatically closing your position.
To avoid an instantaneous margin call, you would have to reduce your position to [B]24 micro-lots.[/B]
If you did that, here’s what would happen:
As soon as your 24-micro-lot position was opened, your broker would set aside CA$480 of your account balance as required margin, and deduct the spread from your remaining CA$20. Let’s say the spread is 2.5 pips, and 1 pip is worth CA$0.11 per micro-lot. Therefore, the cost of the spread on 24 micro-lots would be CA$6.60 (that is, 2.5 pips x CA$0.11 x 24 micro-lots), which leaves CA$13.40 to cover losses, if price moves against you.
In this extreme scenario, a price move of more than 5 pips in the wrong direction would trigger a margin call.
Technically speaking, you can’t risk a 100% wipeout of your account, because of MARGIN. You can only risk the portion of your account which is [B]not[/B] set aside as margin.
Position Size Calculators are set up for normal money management scenarios — not extreme scenarios like “100% risk”.
Under normal trading conditions, where something like 1% to 10% of account balance is at risk, there is no need for the Calculator to account for the margin amount required in the trade.
If you use a Position Size Calculator, and enter the required data, including your “100% risk” figure, you will get an erroneous result.
Are you sure you want to go down this road? Okay, buckle up.
L = the maximum number of micro-lots you can trade
S = the stop-loss, in pips, which you will place on your trade
P = pip-value, in CA$ per pip per micro-lot
B = your account balance, in CA$
M = required margin, in CA$ per micro-lot
L x S x P = B - (L x M)
The left side of this equation represents the loss you will take, if you have L micro-lots on board, and your stop-loss is hit. The right side of the equation represents the portion of your account available to cover losses (that is, your balance minus the total margin required on L micro-lots).
Just to throw some numbers into this equation: Let’s say balance (B) is CA$500, stop-loss (S) is 50 pips, pip-value § is 11¢ per pip, and required margin is CA$20 per micro-lot.
L x 50 pips x CA$0.11/pip = CA$500 - (L x CA$20)
Using your high-school algebra, you should be able to calculate that L = 19.6 micro-lots. Since you can’t trade a fraction of a micro-lot, the answer has to be rounded down to [B]19 micro-lots.[/B] If you placed this trade, a price move of more than 50 pips against you would trigger a margin call. At that point, your margin would be released back to your account, and that amount would be the portion of your initial 500-dollar balance that you did [B]not[/B] lose.