From your first post, I got the impression that you know all this stuff. Maybe I misunderstood you.
Let’s run through a simple example of how you would calculate everything by hand. Then, I will refer you to a
[B]Position Size Calculator[/B], here on this website, that will do it all for you.
Here’s the long way of doing it, by hand:
Let’s say you have a $1,000 micro account. That’s an account which allows you to trade in increments of 1,000 units
(1 micro-lot). And let’s say that you want to trade the EUR/USD, and you are willing to risk no more than 2% of your account on this trade.
Right away, you know two things: You know that your maximum loss on this trade (if it turns out to be a loser) will be [B]$20[/B] (2% of your account balance). And you know that each pip is worth [B]$0.10 per micro-lot[/B] of position size.
You want to figure out:
• where should you place your stop?
• how many micro-lots can you trade?
Regarding your stop-loss, I’m going to say more about that in a minute. For now, let’s say that you decide to set your stop-loss [B]50 pips from your entry price.[/B]
If you trade one micro-lot, and get stopped out, then your loss will be 50 pips x $0.10 = $5. But, you are willing to risk $20. So, obviously, [B]you can trade 4 micro-lots.[/B] If your 4 micro-lot position gets stopped out, your loss will be
50 pips x $0.10 per pip per micro-lot x 4 micro-lots = $20.
That was easy. You can do that one in your head. But, sometimes the numbers don’t work out evenly. In that case, you could do the math this way:
[B]Number of micro-lots = (Account balance x risk %) / (Stop-loss x pip-value)[/B]
For the example above, this works out to:
Number of micro-lots = ($1,000 x 0.02) / (50 x $0.10) = 4 micro-lots, as before.
Suppose that your stop-loss was set at 35 pips. In this case,
Number of micro-lots = ($1,000 x 0.02) / (35 x $0.10) = 5.71 micro-lots.
You can’t trade a fraction of a micro-lot, so you have to round this down to 5 micro-lots. (If you round it up to 6 micro-lots, you will violate your 2% risk limit.)
Make sure that you fully understand HOW position size is calculated. After that, you can let the Position Size Calculator do it for you. Here’s a link to the Calculator in the Babypips Tool-box —
Position Size Calculator: Free Online Forex Position Sizing Calculator
Returning to the topic of setting a stop-loss, you said in your last post —
What you are really saying is that you think your stop should be set according to your pain threshold. And I disagree with that way of doing it.
Support and resistance levels on your chart should tell you where price is likely to advance to, or retreat to, and these levels should guide your choice of a stop-loss location.
When placing your sell-stop below an obvious support level, or placing your buy-stop above an obvious resistance level, you should consider where the majority of traders are likely to be placing [B]their[/B] stops, and then you should place [B]your[/B] stop further away — because stop-hunting occurs. Market-makers know exactly where clusters of stops are resting, and they often have the power to drive price into those clusters, clearing them out. You don’t want your stop to be one of the stops picked off.
If you don’t have a good working knowledge of support and resistance, then you have no choice but to pick a location for your stop-loss at random. In this case, using your pain threshold as a guide is as good a way, as any, to pick a random location.
One final point. You seem to be concerned about the possibility of a margin call. With your tight control on risk (your 2% limit), [B]you are at no risk of a margin-call.[/B]
To satisfy your curiosity, here’s how you calculate how far away from a margin-call you actually are:
You said that the maximum allowable leverage on your account is 500:1. This means that MARGIN is 0.2% (two-tenths of 1%) on each position.
When you place the trade described above, your broker will set aside about $8.40 of your $1,000 account as margin. ($8.40 is 0.2% of your [B]3,000 euro position size[/B]). You would have to lose all of the remaining $991.60 in your account, before a margin-call would be issued. In other words, your 3-micro-lot position would have to go 3,305 pips against you in order to trigger a margin-call. Not very likely!
