[quote=“pipacrobat, post:3, topic:129662, full:true”]
Up until 100 JPY pips = 50 CHF it seems clear. But the steps after that seem to presuppose that USD/JPY is 1 and that therefore, each individual pip change will result in a 1% change and therefore a 1% risk if the trade moves against you.[/quote]
Sorry, none of that makes any sense.
At no point in this calculation is a USD/JPY price presupposed. Furthermore, the USD/JPY price has no bearing on the position size calculation which this example is addressing. This example would be calculated exactly the same way, with exactly the same result, whether USD/JPY was 1.0000, or 10.000, or 100.00, or any other price.
When you talk about “a 1% change and therefore a 1% risk”, you seem to be using 1% in two different contexts:
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a 1% change (what does that refer to, a change in USD/JPY price?),
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and a 1% risk (which I presume you know refers to 1% of the account balance).
There is nothing in this calculation involving any percentage change in any price.
[quote=“pipacrobat, post:3, topic:129662, full:true”]
That has the absurd consequence that Newbie Ned is risking 100% of his risk capital of 50 CHF, because he has decided on a 100-pip JPY stop (100 JPY pips = 50 CHF).[/quote]
There’s nothing absurd about it.
The whole point of this calculation is to establish the fact that IF the price of USD/JPY moves 100 pips against Ned’s position, THEN Ned will suffer a loss of 50 CHF.
Whenever you place a trade with a stop-loss, you are risking 100% of the risk capital you have assigned to this trade. What part of that do you not understand?
[quote=“pipacrobat, post:3, topic:129662, full:true”]
But what if USD/JPY is 111.1 (roughly the current rate). Then 100 pips will result in 1/111.1*100% change, rougly 0.9% change. Then we would have Min(5000,50/(1/111.1)) CHF as the maximum Ned can risk.[/quote]
Okay, let’s use approximate current prices:
USD/JPY = 111.10
CHF/JPY = 114.60
In every case in which JPY is the quote currency, one pip = 0.01 JPY. That’s the definition of “pip”. It’s 1/100 of one JPY in yen-pairs, OR 1/10000 of the quote currency in any other pair.
Let’s get back to Ned.
Ned can’t understand how to calculate position sizes, so he just guesses.
He’s willing to risk up to 50 CHF on this trade, but no more.
He tries a position size of ONE UNIT of USD/JPY.
He has a 100-pip stop loss, and sure enough, the price of USD/JPY moves 100 pips against him, and stops him out.
How much did he lose in his CHF-denominated account?
One pip is 0.01 JPY, so 100 pips is 1.00 JPY. Ned has lost the CHF-equivalent of 1 yen, but how much is that?
Well, CHF/JPY = 114.60 (current price from above).
That price can be read as: 1 CHF = 114.60 JPY. So, 1 JPY is (1/114.60) CHF.
That is, 1 JPY = 0.008726 CHF.
That’s how much Ned lost on this trade – less than 1/100 of 1 Swiss franc.
But, Ned was willing to risk (lose) 50 CHF, if this trade ended in stop-out. So, obviously, a position size of 1 unit isn’t accomplishing Ned’s purpose. He needs a much larger position size. But, how much larger?
Well, in order to ramp up his risk from 0.008726 CHF to 50 CHF, he’d have to multiply it by 50/0.008726, which is 5,730. So, Ned needs to increase his position size from 1 unit to 5,730 units, in order to match his 100-pip stop-loss to his predetermined 50 CHF risk.
Bottom line: Given the current price of CHF/JPY, a position size of 5,730 units of USD/JPY, with a 100-pip stop-loss, results in risk (loss at stop-out) of 50 CHF.
You can plug these numbers into the Position Size Calculator, linked to in my previous post, to confirm these results.
Notice that the USD/JPY price did not figure into this calculation. Also, if you use the Position Size Calculator, you will not be asked for a USD/JPY price. It’s irrelevant.
