Hello everyone, I’ve been trading for about 2 years now, so I’m not completely new to the game. However, I still have a lot to learn. I have a question about figuring out how many units one is able to buy (or sell) of a particular currency pair. Is there a formula for this? Also, I have recently started trading ZAR/JPY because I have been able to pull in a bit more profit from that because, for some reason, I am able to trade many more units of this pair than any other. Why can I trade 100,000 units of ZAR/JPY at a price of about 7.996, but only trade about 10,000 units of another pair with the price that is a fraction of that (for instance, AUD/CHF)?
I’ll have to guess at some of the information you haven’t provided, specifically your account currency.
So, just to continue the conversation, and formulate an answer to your question, I’ll assume that your account currency is USD, and you are trading a US-regulated retail account (meaning 50:1 leverage limit and 2% required margin).
When you trade 100,000 units of ZAR/JPY (or any pair in which ZAR is the base currency), your position has a notional value of 100,000 ZAR.
To convert this to USD (your assumed account currency), we divide 100,000 ZAR by the current price of USD/ZAR, as follows:
Notional value in USD = 100,000 ZAR ÷ USD/ZAR
The current price of USD/ZAR is 13.7900, which means that 1 USD = 13.79 ZAR
Therefore, notional value in USD = 100,000 ZAR ÷ 13.79 = $7,251.63
In order to trade a $7,251 position size, your account must provide 2% required margin = $145.02
If you do a similar calculation for the AUD/CHF trade which you mentioned, you will determine that a 100,000 AUD position has a notional value in USD of $75,000 (at the current AUD/USD price of 0.7500).
That is, 100,000 units of AUD/CHF is worth more than 10 times as much as 100,000 units of ZAR/JPY. And, in order to trade 100,000 units of AUD/CHF (or any other pair in which AUD is the base currency), your account would have to provide required margin = $1,500.
That’s why you can trade 10 times [I]as many units[/I] of ZAR/JPY as AUD/CHF.
Note that this 10:1 ratio (based on [I]current prices[/I]) applies to any account, regardless of what the account currency is. I based my answer to your question on an account currency assumed to be USD, simply in order to do the math.
Second note: the [I]quote currencies[/I] in these trades do not figure into the calculations. So, we could say that you can trade 10 times [I]as many units[/I] of ZAR/XXX as AUD/YYY, regardless of what currencies XXX and YYY represent.
Thank you so much! Yes, My account is in USD, and I use the standard 50:1 margin. So what I get from this is that the Australian dollar is worth much more when converted to the US dollar than is the Rand in US dollars. That makes sense, considering that neither of the pairs I’m trading contain USD, so the value must be figured by converting each currency to USD (which I believe is what you referred to as notional value). It still seems interesting that I can only use about $145 to make roughly $10/pip. Also, it seems like the notional value is figured out only using the base currency of each pair. Is that correct? Would I need to also figure in the Yen or Franc somehow? When I make a trade, the platform I use just tells me how many units I can trade and how much of a potential profit I can make, so I really didn’t understand how that was figured before. Thank you again!
That saves us from having to do the math all over again in some other account currency
Or, you could simply say that one AUD is worth much more than one ZAR, without reference to a quote currency, or to your account currency.
I don’t have an AUD/ZAR rate on my platform, so let’s create a [I]synthetic AUD/ZAR rate[/I] using the AUD/JPY and the ZAR/JPY.
As of the New York close on Friday, AUD/JPY = 83.225 bid, and ZAR/JPY = 8.055 bid.
These prices can be read this way: One AUD is worth 83.225 yen, and one ZAR is worth 8.055 yen. In other words, one AUD is currently worth more than 10 times what one ZAR is worth.
The synthetic AUD/ZAR price referred to above is simply the ratio of these yen prices.
Note that it’s presently early Sunday morning (New York time), all the retail forex markets are closed, and the prices shown on trading platforms are [I]weekend prices,[/I] in which the spreads have been widened considerably. So, the bid prices used to calculate our AUD/ZAR synthetic price were likely lowered (after the Friday close) as part of that spread widening. However, [I]the ratio we calculated (10.332)[/I] most likely has not been distorted significantly by these weekend price adjustments.
Notional values can be stated in any currency you choose. One lot (100,000 units) of ZAR/JPY has a notional value of 100,000 ZAR. One mini-lot (10,000 units) of AUD/CHF has a notional value of 10,000 AUD.
And, as you say, those notional values can be stated in terms of USD (or any other currency you might choose), by doing the appropriate conversions.
Interesting, indeed.
ZAR/JPY is an exotic currency pair, and I have to admit that I don’t trade exotics, and am not any sort of expert on exotics.
However, your post has gotten me interested in learning about this particular pair, because it is so different from the majors that I’m used to trading.
You are correct that the pip-value for standard lots (100,000 units of ZAR) is roughly $10 per pip. And ZAR/JPY price-moves (in terms of pips) are comparable to other pairs. So, there is significant profit potential (as well as significant risk) in trading large positions in ZAR/JPY.
One standard lot is definitely a large position in an account with only limited capital to commit to margin (which your first post above seems to imply is your current situation). So, regardless of the surprisingly low margin requirement on this particular pair, be very careful to control your risk when trading this pair.
As always, your risk-control procedure should be (1) determine sensible price-points for entry, stop-loss, and take-profit, [I]before you even think about position size;[/I] (2) obey your own rule regarding the percentage of your account to risk on any one trade; and (3) enter your stop-loss and risk percentage into the Position Size Calculator, [I]and let the calculator tell you how big you can trade.[/I]
Don’t be lured into trading standard lots of ZAR/JPY, or any other pair, just because you can afford the margin.
Absolutely correct.
The notional value can then be stated in any currency you choose. Example: your standard lot of ZAR/JPY obviously has a notional value of 100,000 rand, which you can then convert to your account currency (dollars), using the current price of USD/ZAR.
No. The notional value of a currency trade is determined by the base currency, only.
The pip-value, on the other hand, is determined by the quote currency, only.
So, one standard lot of ZAR/XXX has a specific notional value, regardless of what currency XXX represents. And one standard lot of YYY/JPY has a specific pip-value, regardless of what currency YYY represents.
Well, [I]how many units you can trade,[/I] and [I]how much profit you can make[/I] are different considerations, which must be based on different metrics. Be careful not to confuse them.
If I understand what your platform is telling you, the number of units you can trade is based entirely on whether you have adequate free margin in your account. That’s how you got involved in a position size of 100,000 ZAR/JPY.
In any trade you enter, it’s obvious that you have to be able to cover the required margin, with enough account equity left over to cover losses (should they occur) – BUT, those factors should not determine your position size (how many units you can trade). Your position size should be determined (by you, not by your platform) based on your risk parameters, as I described above.
As for potential [I]dollar-profit,[/I] don’t even focus on that.
Focus instead on a potential price move, from price level A to price level B, based on your own strategy, and on your personal trading rules. Plan to take a trade if, and only if, that potential price move meets all of your criteria. Then, [I]apply strict risk management[/I] to your calculation of a position size.
[I]Insist on high quality[/I] in any trade you choose to take. [I]Control the maximum loss[/I] you will suffer if you are wrong. And make sure the trade you are considering offers [I]profit potential (in pips) that justifies the risk (in pips)[/I] that you are planning to take.
Then, let the dollar-amount of your potential profit take care of itself.
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I’ve been looking at ZAR/JPY charts, with an eye on price action. ZAR/JPY is an interesting pair. I have noticed that this pair has the capacity for huge [I]percentage moves,[/I] and I wanted to see how that translates into [I]pip moves.[/I] Here are two screen-shots which I took a couple of hours ago:
Thank you so much for your very thorough explanation! I will definitely keep the things you mentioned in mind as I trade. Forex seems a bit more complex than trading stocks, but I find it much more exciting for some reason. However, I’d still like to keep at least a somewhat diversified investment portfolio.
