I’m having trouble wrapping my head around proper position sizing. I tried following multiple example but they just leave me confused.
Say I have $1000CAD in my account and wish to risk 5% per trade, that would mean 50$ stop loss per trade. Now, for example, if I were to trade the USD/CAD and wish for a 25 pips stop loss, this would mean 1 pip = 2$.
Now how do I go about coming up with a number to put in as position size? Also, where do marin/leverage fall in this? On my demo account, I have the leverage options of 1:10 through 1:50. How does it affect position sizing?
Any help or pointers would be appreciated, thank you
Now for margin and Leverage, higher leverage gives you higher volume power and lower margin requirement. For example
With a 1:10, you have $1000 and want to risk 5% with a 25 pip stop loss, now that’s 2 mini lots which give $2 per pip according to your example. So margin = notional value/leverage that is 20,000/10 = $2000. And you have an account balance of $1000, you see now that you don’t have that much buying power or volume control.
With a 1:50, same as above except let’s calculate the margin. Margin now becomes 20,000/50 = $400.
So your broker keeps $400 and opens yours position.
I hope you are not planning to risk 5% in one trade? as a beginner try .5%
Basically if I understood correctly if we take your example with 1:50, the “margin used” would be at 400$ at the moment of opening, correct? I think my mistake was mixing up “available margin” and “risk per trade”, I thought risking 50$ meant only actually committing 50$.
Also, the figures are just for the sake of the example.
Come to think of it, is there a maximum amount of account percentage to actually use in a trade? Can I put my whole account on the line if I have a 2% stop loss?
Say I have 1:1000 leverage, with 2 mini lots on a 1000$ account, that would mean the broker keeps 1000$ right?
With that kind of leverage, broker keeps $20
Always do the margin calculations if you want to go big or go home, so you know by how many pips you actually go home.
as a beginner, make your position sizes represent 0.5% of your account
and at least for your first year after being a beginner never let them be more than 1%
no criticism intended, we all started off knowing nothing, but your questions make it very clear that you’re a long, long way from trading a live account for money
no, not right at all
the figure the broker removes from your account when you open each trade varies greatly from broker to broker and is designed to allow for the contingency that they may not, in a fast moving market, be able to honor your stop loss
you need to look at your broker’s requirements and policies, and understand them, and practice dealing with them, on a demo account with the same parameters and notional capital and leverage that you plan to use in a real account, for a long time, before trading with real money
and whatever you do, don’t use more than 1:50 leverage until you have plenty of experience
as a beginner try .5%