# Money Management Math Question

Hello,

If I may ask, I would love anyone to please go through this simple math with me, so I understand how to do it.

Lets say, I have a mini account with \$2,000. So, a lot size is \$10,000. I have a 100:1 margin… ok, got that so far.

If I do the math for lets say USD/JPY at an exchange rate of 119.90 (like on the site)
(.01 / 119.80) x \$10,000 = \$.83 per pip… ok got that

So, if I buy 1 lot of USD/JPY… my usuable margin would be \$1,980 ?? Is this correct? (ASSUMING margin requirement is 1%)

If I buy .1 lot, does that mean (.01 / 119.80) x \$1,000?? = .083??

Does that also descrease my margin requirement to \$1.00 ?? This can’t be right.

What am I obviously missing here?

Jeff.

ok, since you said anyone, I will jump in here… i am fairly new to this too. Still trying to understand this margin and leverage stuff but this is my understanding

first the leverage in your example would be 5:1 (if 2000 is capital and you opened a mini account). You referred to it as margin but margin is generally stated in percentages (percentage of the type of the account. So 1% margin account on a mini account would require \$100, 2% would require 200, etc.)

If I do the math for lets say USD/JPY at an exchange rate of 119.90 (like on the site)
(.01 / 119.80) x \$10,000 = \$.83 per pip… ok got that

So, if I buy 1 lot of USD/JPY… my usuable margin would be \$1,980 ?? Is this correct? (ASSUMING margin requirement is 1%)

Your usable margin would be your starting capital of 2000 (going by your above example) less the used margin which is \$100 (unless you used more capital thereby lowering your leverage and risk-but on this 1% mini account example you must use at least \$100 per lot). This equals 1900 usable margin (2000-100). Not too sure where you got the 1980 from…unless i am missing something

If I buy .1 lot, does that mean (.01 / 119.80) x \$1,000?? = .083??

Does that also descrease my margin requirement to \$1.00 ?? This can’t be right.

that’s right if you bought .10 lot each pip would be worth .083…so if you took a smaller position you would make less money on each pip move or conversely you would lose less money if the market went against you. The pip size doesn’t have anything to do with the margin requirement as far as i know

umm…As far as i know the margin requirement wouldn’t decrease on a standard or mini account…in this case that would make their leverage 100000/1 or 10000/1 respectively which is obviously really high and kind of lol (not lol at u just my e.g. seems really funny and it’s late)

Anyway, i do believe there are micro accounts which i believe allow for 1\$ deposits but not sure on this

maybe i should not be commenting on these questions but i thought i would give it a try…as i said i am still in the learning early stages too. If anyone with more experience can elaborate or correct please advise

Why does EUR/GBP took the plunge breaking a 12-day trend? I lost a lot of money because of this. It took the plunge just after I invested. Can the market be manipulated?

I have observed yesterday that each time I invest, the market always goes to the opposite direction…and can anyone also explain why the yen suddenly went up sky-high from 116.71 to 117.98?

also webjeff,

the last section in the babypips school goes over some of the stuff your questioning with examples. That might help to relook at this or skip ahead to this part to sort out some stuff for youself.

xblaster,

this has happened to me a few times too. I have learned to to wait to enter if it’s near a resistance or support line.

Using more capital through the use of lower leverage ratios does not itself lower risk. The only thing that changes your risk is changing your position size. If you have a \$1000 account and are trading a \$10,000 position it doesn’t matter at all if you have 100:1 leverage or 200:1 leverage. Your risk is exactly the same.

Someone help me figure out some more math. Basically I want to trade at \$2 a pip. I have a mini account (10k) lots.

EUR/USD price is 1.1930

Price per pip is (.0001 * 10,000) = \$1.00 per pip for this pair

So, I want to trade 2 lots at a time for \$20,000 to get my \$2.00 per pip, is this correct?

Second, Lets say I’m at 100:1 margin. My margin requirement would be \$200 (20,000 / 100)… correct?

If I had 2,000 in my account, my used margin would be 200, my usuable would be 1800… correct?

This way, I would be able to sustain losing 900 pips before my margin call… can someone please check my math and tell me if I made a mistake?

I think that’s what i meant but I was using the wrong terminology…oops.

so let me know if i have this straight…

actually, now i am confused after thinking about it…maybe if i draw out the different scenarios i will grasp it better (which i will do when i have more time). But just to clear some things up for myself…are you saying that trading 1 lot vs. trading .5 lot is more risky or are you saying that 100 capital vs 200 capital is more risky?? I guess i am missing why everyone/site is so emphatic about trading a lower leverage. I guess i thought this was why it was more risky…b/c you have less capital…does this make sense??

i guess i better go back to pip school again

The amount of capital you have doesn’t affect the margin requirement; that is determined by the leverage you choose to trade at. Leverage has nothing to do with the amount of money you have in the ‘bank’ (also known as your ‘capital’). If I have \$5,000 in my account, then I have \$5,000 whether I choose to trade at 20:1 leverage or 50:1.

As I understand it, higher leverage will magnify the effect of market movements against your account, thus giving you less time to react to market changes. That makes trading at 50:1 more risky than trading at 20:1. Simply put, you’re borrowing more money at higher leverages than you are at lower leverages. If the market goes your way, that works in your favor. If it goes against you, you incur losses quickly and risk the dreaded <insert dramatic crescendo here> Margin Call!

The way I see it, what determines your risk is the amount of your capital that you’ve exposed to the market, as well as where you put your stop loss and take profit levels.

i think i got it now. your position will determine the pip value and if you have a small account and take advantage of the leverage (to get a bigger position=higher pip value) your account won’t have enough cushion (which is really your usable margin, right?) for any swings. In my experience and maybe you guys/gals will concur that the market sometimes swings against you before it goes your way or sometimes it go your way right away and then go against you and then back again (i’m sure u get the pic.) so it’s important to have enough room to let it get to your TP. On a smaller account you’re more likely to get margin called since your used margin is more likely to become > equity very quickly…

good??

You absolutely need to allow your positions sufficient breathing room. The market experiences natural volatility that can really have very little to do with the move that you’re trading. If your stop doesn’t allow for that you will experience that most frustrating of situations where the market moves against you just enough to stop you out, then reverse. (If you’re one of those who feels the need to blame others for your own short-comings, you claim that your broker ran your stops.)

I would clarify this statement by saying “actual leverage” or “gearing” or “effective leverage”. By that I mean looking at the ratio of your position size to your trading account. For example, if you are trading a \$100,000 position on a \$10,000 account, that’s 10:1 gearing or effective leverage. When talking in those terms, then it is certainly true that higher leverage implies higher risk.

I think a lot of new traders confuse the above with available leverage - the leverage your broker will allow you to trade at (100:1, 200:1, etc.). Available leverage doesn’t have anything to do with risk, unless you actually use it all.

The way I see it, what determines your risk is the amount of your capital that you’ve exposed to the market…

Exactly!