How to calculate Maximum Margin Stop out Leverage?

Beginner Questions
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Let’s calculate the maximum lot size you can use to avoid getting stopped out before your stop loss (SL) level, based on your provided information.

Assuming you have a $300 USD account balance with a leverage of 1:500, and your SL position is 50 pips below your entry point, we can determine the maximum lot size by trial and error.

SCENARIO 1:
Let’s try a lot size of 0.6, which is equivalent to 60,000 units.

The margin requirement for 0.6 lot size would be:
Margin requirement = 60,000 / 500 = $120 USD

This means $120 USD would be deducted from your $300 USD account balance and set aside as margin for opening a 0.6 lot size long position on EURUSD.

After deducting the margin requirement, you are left with $180 USD for drawdown. For a 0.6 lot size position, each pip movement has a value of $6 USD. Thus, with $180 USD available, you can withstand a drawdown of up to 30 pips ($180 / $6). However, this falls short of your desired 50-pip stop loss.

SCENARIO 2:
Let’s try a smaller lot size of 0.4.

The margin requirement for 0.4 lot size would be:
Margin requirement = 40,000 / 500 = $80 USD

This time, $80 USD would be deducted from your $300 USD account balance as margin for opening a 0.4 lot size long position on EURUSD.

After deducting the margin requirement, you are left with $220 USD for drawdown. For a 0.4 lot size position, each pip movement has a value of $4 USD.

Calculating the drawdown capacity:
Drawdown capacity = Available balance / Value per pip
Drawdown capacity = $220 USD / $4 USD per pip = 55 pips

Therefore, with an account balance of $220 USD and entering a 0.4 lot size long position on EURUSD, you can tolerate a drawdown of approximately 50 pips. However, keep in mind that opening a position often incurs a commission of roughly 1 pip, which amounts to $4 for a 0.4 lot size position.

In conclusion, I recommend entering a 0.4 lot size long position on EURUSD to ensure your $300 USD account balance can withstand a drawdown of around 50 pips, which is close to maximizing your margin requirement for facilitating a 50-pip drawdown.

I understand that your account is actually 300 Euros instead of 300 USD. Now that you know how to perform the calculation, you may convert your account balance to USD, which is roughly $327 base on current EURUSD exchange rate.

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14

Thabk you so much. This is the first answer I got on about 4 forums that somewhat answers my question

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You are welcome!
:slightly_smiling_face:

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Super!
Could you give us an ilustration of how pip values of JPY pairs are calcualted?Thanks

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This is the answer I got on a different forum:

That’s an interesting question. To answer it, it’s crucial to understand what stop-out level is and how the formula for checking whether it was hit works. For the sake of simplicity let’s consider that your account is in USD, not in EUR.

Stop-out level is the threshold value for the account’s margin level when all trades will be closed. Margin level is calculated as Equity / Used Margin.

For example, if your account’s stop-out level (set by the broker) is 30%, then your trades will get automatically closed when Equity / Used Margin = 0.3.

And what is Equity for the purpose of your task? It is the equity that will be in your account when your trade reaches the stop-loss, so it’s Account Balance - Position Size * Stop-Loss * 10. Or for your example, Equity = 300 - PS * 50 * 10, where PS is the position size, which we are trying to calculate.

Used Margin is (PS * Contract Value) / Leverage. For a EUR/USD trade and USD account, the Contract Value depends on the current EUR/USD price, let’s use 1.09. Then For your example, UM = (PS * 109,000) / 500.

Now, if we combine everything with the margin level formula, we get:

0.3 = ((300 - PS * 50 * 10) * 500) / (PS * 109,000)

0.3 * 109,000 * PS = (300 - PS * 50 * 10) * 500

32,700 * PS = 150,000 - 250,000 * PS

32,700 * PS + 250,000 PS = 150,000

282,700 * PS = 150,000

PS = 0,53 - this is in standard lots.

In general, the formula for quick calculation (which you can create in Excel for example) is the following:

PS = (Balance * Leverage) / (Contract Value * Stop-out Level + SL * Leverage * 10)

Important note #1: “10” is the value of 1 pip for 1 standard lot.

Important note #2: If your account is not in USD, two adjustments have to be done. First, the contract value becomes 100,000 (for EUR/USD). Second, that “10” becomes “10 divided by EUR/USD Bid rate”.

Important note #3: If you are trading some other currency pair, all the necessary conversions have to be done accordingly. For example, if you are trading AUD/NZD, the contract value has to be adjusted (because it’s 100,000 AUD) and the pip value should be adjusted (because it is 10 NZD).

I hope this makes sense.

EDIT: Important note #4: If you have other trades open in your account, this becomes quite complicated and somewhat unsolvable.

So I got no idea what they meant here. How is one supposed to calculated in the Position size without knowing what the position size is beforehand… i was never good at maths

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For ALL USD denominated currency pair, such as
EURUSD
GBPUSD
AUDUSD
NZDUSD

For a,
1lot position size, it is ALWAYS $10 USD per pip value

0.1lot position size, it is ALWAYS $1 USD per pip value

0.01lot, it is ALWAYS $0.10 USD per pip value

Screenshot_20230706-153653_MetaTrader 4
Screenshot_20230706-153653_MetaTrader 41080×870 99.2 KB

The pip value of any JPY demominated pair such as

EURJPY
GBPJPY
AUDJPY
NZDJPY
USDJPY
CADJPY
CHFJPY

always use the CURRENT USDJPY exchange rate for conversion, as shown in the chart above, current USDJPY exchange rate is 143.749

for easy conversion just take
$10USD /1.43749
=$6.95 USD

Thus, for a 1-lot position in a JPY-denominated pair, the per pip value of ALL JPY-denominated pairs depends on the CURRENT USDJPY exchange rate, which is approximately $6.95 USD at the present moment.

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In retrospect, I believe it is always a good idea to open a USD-denominated account balance. The reason for this is that the USD-denominated pair per pip value for a 1 lot position size is consistently $10 USD. Clarity is essential for traders, so it is important to keep our calculations as simple as possible.

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Seems generated by chatgpt. Either the person posting has no awareness that his method of instruction are simply BAD. Or i’m too dumb and lazy to comphrehend what he is trying to explain.

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(post withdrawn by author, will be automatically deleted in 24 hours unless flagged)

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What about when ur trading eur denominated pairs? Is it better to have opened a Eur account?

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exactly … and doesn’t want to listen … i regretted having replied, above, in the first pace :frowning:

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This is my understanding, anyone please correct me if i’m wrong.

EUR/USD

EUR is base currency (a.k.a. numerator IMO)
USD is quote currency (a.k.a. denominator IMO)

So EUR currency can be denominated with all other currency. By convention, i don’t think there is any currency with EUR as the denominator from any spot forex broker.

Reason probably due to the larger exchange rate value of the EUR against other currency.

Imagine jpy

the exchange rate index would be

say the EURJPY is currently 156.390

then JPYEUR index becomes
1/156.390
=0.00639

If their convention is 5 decimal places, the pip value is too small to be useful, and the broker may have to include more decimal places and come up with a 7-decimal-place system or a new industry benchmark method, such as a recognizable JPYEUR index. Thus, I think it is an industry benchmark convention to trade spot forex indices close to 1.00000 with 5 decimal places or 100.000 with 3 decimal places.

So, regarding your question, I assume that your use of the word “denominated” has a different meaning than how I understand it. It seems that the word “denominated” has different meanings in two different contexts.

Anyway, it doesn’t matter which currency you use to open your account with your broker. The real-time balance is automatically adjusted regardless of the currency, so it doesn’t mean that if you trade EUR pairs, you have to open your account “denominated” in EUR. It doesn’t matter at all.

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Now, i’m wondering why i attempt to answer your question when it doesn’t matter at all.

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@chesterjohn May I please ask why you say MT4 is junk?

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@alphahavoc Very good and responsive answer.

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Its junk compared to ctrader imo

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I guess I am the one that used the word denominator wrong.
I was basically asking you, why exactly do you recommend always opening a trading account with the USD currency. I really trade all types of pairs, most of them dont involve UDD at all. So I am guessing there would be no benefit for me…?

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It is simply a personal preference to open an account denominated in USD. In practical terms, it doesn’t really matter at all. :blush:

Furthermore, if you are living in a country that adopts the euro as its common currency, then it actually makes sense for you to open an account in euros instead of USD.

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It was made 20 years ago and looks like it’s even older. Ctrader is better on almost every level.

Mt4 is cheaper for brokers so they all push it as being the most popular knowing that newbies don’t know better and most people don’t like change

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may i also add something to John’s answer just above?

people thinking of using MT4 might care to read all of the post linked to just below ( one of the most important, most relevant and potentially most helpful posts in the entire forum), take it seriously, follow the video link in it and the link at the end and take them seriously, too!!

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Do you have an opinion on blueberry markets?

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