Hi guys,
Big fan and I’ve learnt a lot through BP.
I’m trying to use some of the calculators here (Pip Value and Position size); however I’m still a little confused. When ready, I plan on depositing $3,000 AUD into my trading account. This would go under micro lot I’m assuming. If my broker’s leverage rate is 1:30, how would I work out how to risk 1% of my account every time?
I am focusing on one currency at the moment, AUD/JPY.
I apologise if this isn’t a newbie question.
Thank you.
Hi there,
1% risk of 3000 AUD = 30 AUD you’re ready to risk with in your trade. This limit is set up with the help of Stop Loss. All you need is to know the pip value for AUDJPY. Your Broker leverage 1:30 does not influence it. Leverage is the maximum exposure you may potentially open (total volume of trades). For eg., 3000 = 0.03 lot size x 30 = 0.90 (maximum trading volume the system will allow you to open).
So, in order to set up the Stop Loss properly at 1% risk you need to know the pip value for AUDJPY. You account base currency is AUD, correct? With the current rate of AUDJPY 71.2720, in the position size 0.10 AUDJPY (= 10000), one pip costs 1.40 AUD. So your Stop Loss should be within 20 pips from the entry price.
In the position size 0.01 AUDJPY (= 1000), one pip costs 0.14 AUD. So your Stop Loss can be up to 200 pips from the entry price.
Yes, the best way is to use pip value calculator to avoid any mistakes: https://www.babypips.com/tools/pip-value-calculator:
Currency Pair - AUD/JPY
Ask Price - 71.272
Position Size (units) - 1000 (for 0.01)
Account Currency - AUD
Results
Pip Value - 0.140308
Hello, King-E
I have to disagree with some of what was said in the reply from HonestTalk.
If I correctly understand your post, you commented that your initial deposit of 3,000 AUD would likely be suitable in a Micro Account – i.e., in an account in which you can trade in micro-lot increments.
You were not saying that you want all your AUD/JPY positions to be one micro-lot.
Therefore, calculating backward from a position size of one micro-lot, and suggesting a stop-loss of 200 pips, doesn’t make sense.
Instead, for each trade you take, your stop-loss should be determined according to market structure and price action – not the way suggested by HonestTalk.
Let’s start over.
The Pip Value Calculator is not needed here. The Position Size Calculator will take the pip value into account when it crunches the numbers.
But, before you can calculate a position size, a number of things need to be determined.
Let’s review those things:
• First of all, your Trading Plan specifies that you will risk only 1% of your account on this trade (or on any trade).
• You have chosen the currency pair you intend to trade – in this case, AUD/JPY.
• From your charts, you have determined:
• You have compared your profit target to your stop-loss, to be sure that the profit (in pips) that you anticipate justifies the risk (in pips) that you are about to take. In other words, you have determined that the R/R ratio for this trade is acceptable.
All of that should be determined before you even consider position size.
For the sake of this example, let’s say that you have chosen to place your stop-loss 50 pips from your entry price. And let’s say that the current price of AUD/JPY is 71.31.
The last step in the design of this trade is to determine how large a position to take, based on the metrics listed above. This is a straightforward process, made super-easy by the Position Size Calculator.
Here’s how it looks with all the metrics entered –
The Calculator confirms your 1% risk (in dollars) as 30 AUD, and quotes the position size it has calculated (in terms of several equivalent options).
The option which applies to your Micro Account is: 4.2786 micro-lots. If your account allows trading only in whole numbers of micro-lots, then you will round this figure down to 4 micro-lots.
This position size (4 micro-lots) will correspond to slightly less than 1% risk on this trade. But, rounding up to 5 micro-lots would exceed your predetermined limit of 1% risk per trade.
Finally, as HonestTalk pointed out, the maximum allowable leverage (30:1) offered by your broker does not enter into this calculation. That maximum allowable leverage is simply a limit, which you may not exceed.
In the example worked out above, your 4-micro-lot position has a notional value of 4,000 AUD.
So, in your 3000 AUD account, this trade is using only 1.33:1 actual leverage (4000 ÷ 3000 = 1.33…).
Firstly thank you for both of you for replying, I did not expect this type of answer.
I uh, yeah just wanted to say I finally understand now. I think the style of trend following is more my thing but I am still new so I don’t want to put a unexpected result. My R/R that I feel comfortable with in my plan is 1% risk for 3% profit. I’d like to learn more about trailing stops in the future.
For reference, I’d like to mention one thing. If for example I wanted to place a 100 pip stop loss. As long as I enter 1% in the calculator, it will give me the appropriate lot size equal to 1% risk? I’d assume I’d have to triple the pips from whatever the asking price is to give me 3%.
Thanks so much guys.
Correct. I’d suggest putting some typical numbers into the Position Size Calculator and noting the position size quoted. Then, change the stop-loss and re-calculate. If you double the stop-loss, you will see that the position size gets cut in half. In each case, the Calculator is sticking to the 1% risk parameter that you specified.
Yes, if 1% risk corresponds to (say) 100 pips, then a 3% profit target would correspond to 300 pips.
God bless my friend.
Hi Clint,
I wanted to inbox you but I can’t find a way to create a new message.
Anyway, can this also apply to markets that trade other materials? Example, corn, silver, gold etc. I can’t seem to find a calculator online as simple as the one BabyPips have.
Thank you.
Well, the concept behind the Position Size Calculator applies to any market in which positions are leveraged — and this includes the markets you asked about.
But, I simply don’t know how you would go about entering metrics from some market other than forex (the corn market, for example) directly into the Calculator, in order to generate an appropriate position size.
I know this doesn’t answer your question. Sorry about that.
