My question is regarding position sizing. I have a demo account with $500 balance and 20:1 leverage. Now I want to calculate the position size that I should use in order to lose 1% ($5) of my balance if the stop loss is hit. I used the babypips Position Size Calculator, set my balance ($500), set my risk (1%), my SL in pips (let’s say 27 pips), and the pair (let’s say USDCAD). It says I should open a position with the size of 0.0241 standard lots.
My question is: how will I lose only $5 with 20:1 leverage? What if my account is set to 50:1 leverage, how will I still lose $5? The calculator does not take the leverage into consideration, so how is it supposed to work and make me lose 1% each time regardless of my leverage? Is it because the $500 is the balance with the leverage (and the actual margin in my account is 500/50=10) or some other reason?
Leverage just determines how much initial margin is required by your forex broker to open a position.
Let’s take the example you gave:
The calculator recommends 2407 units so your position size would be 2,000 units or 2 micro lots.
Assuming you have a USD account currency, 2000 CAD = ~$1539. (You’re opening a USD/CAD position.)
If your broker didn’t offer leverage, you’d be required to have $1539 to open this position.
But if it offers 20:1 leverage, you only need $76.95 (1539/20) to open the position.
If it offers 50:1 leverage, you’d need only $30.78 (1538/50) to open the position.
But in both cases, if the price goes against your trade, your loss is the same.
With higher leverage, you’d just have more “free margin” available to use either to withstand a larger loss on this position before you get margin called or to open other positions.
