Position size formulas contradiction

Trading Discussion Risk Management Practices
1

Hi! Im a new trader here and I have a Dilemma. I struggled for over a week now and I couldnt find a solution to my problem. Why position size formulas are different and give different results? For example we took the example in the baby pips lesson on how to position size when the account denomination is the same as the quote currency:

Account denominated in USD

Balance: 5000 USD

Risk: 1%

Pair: EUR/USD

Stop-Loss: 200 Pips

  1. Convert in the percentage risk in the amount of USD you are actually risk :

(5000 x 1) / 100 = 50 USD at risk

  1. Divide the amount risked by the stop to find the pip value :

50/200 = 0.25 USD / pip

  1. Multiply the value per pip by a known unit/pip value ratio of EUR/USD :

0.25 x [(10000 Units EUR/USD / (1 USD per pip)] = 0.025 (2500 Units) of EUR/USD

Used leverage = 2500$ / 5000$ = 1:0.5 Used leverage

I tested this result on five different online calculators including BabyPips calculator and the result is the same.

Now another formula from a guy who seems pretty experienced (I dont know if I can tell the name of the youtube channel here but I wont). This formula is on multiple sources as well with the same result.

This is the formula:

(Acc. Balance x Risk%) / (Stop Loss x Value per Pip). In his video he puts an example that worked with the forex calculator.

The example was:

Acc. Denominated in USD

Account Balance: 10000 USD

Pair: EUR/USD

Risk: 3%

Stop Loss 30 pips

Value per pip: 10 USD

The answer when manually calculating the formula was 1 Standard Lot (100000 Units) the same result was in the forex calculator…

BUT

When I try to calculate the example from baby pips lesson the result is different:

Acc. Denomination USD

Acc. Balance: 5000 USD

Pair: EUR/USD

Risk: 1%

Stop Loss: 200 Pips

Pip value from baby pips example 0.25USD/pip

Result 1 Standard Lot (100000 Units)

Used Leverage: 100000$ / 5000$ = 1:20 Used Leverage

In baby pips school of pipsology at the Preschool phase they don`t teach us to calculate pip value like that.

I searched a lot about pip value and I couldnt find any formula that doesnt ask units (since I need the formula to find the pip value to position size of course that I don`t know the lot size).

Can someone help me with this problem? What am I doing wrong here? I really searched almost everywhere but different answers, I really dont know which formula is correct and to be honest Im stuck. I really want to go back on my learning. Thank you in advance :slightly_smiling_face: !

2

Hello Mace,

Position size calculation - error

You can’t do a new calculation by importing a partial result from a previous calculation.

The 0.25 USD / pip that you plugged into the formula has nothing to do with your current calculation.

The formula you found online is accurate, as long as you use it properly. It’s critical that you understand what the term “value per pip” means in that online formula.

Refer back to the instructions in the Babypips lesson —

3. Multiply the value per pip by a known unit/pip value ratio of EUR/USD

"A known unit / pip value ratio" means any one of the following equivalent values. Take your choice.

  • $10 / pip / standard lot

  • $1 / pip / mini-lot

  • $0.10 / pip / micro-lot

Why are those the 3 choices you have for use in the online formula?

Because whenever the account currency and the quote currency are both USD, then pips are worth the dollar-amounts shown above. (When the account currency and the quote currency do not match, you have to calculate the correct pip-value ratio, using the current price of the pair you intend to trade.)

Let’s use $1 / pip / mini-lot, because it’s a convenient figure, and let’s test your online formula using the example from the Babypips lesson.

(Account Balance x Risk%) / (Stop Loss x Value per Pip)

($5000 x 1%) / 200 pips x $1 / pip / mini-lot)

If you do the algebra correctly, the $-signs cancel out, pips cancel out, and you get —

(50 / 200) mini-lots

which is —

0.25 mini-lots = 2.5 micro-lots = 2500 units

All of this should teach you two things —

  • The Position Size Calculator uses a logical formula to determine the answer it calculates for you, and you can duplicate the steps it follows, in order to understand what it is doing.

  • Duplicating the work done by the Calculator is a pain in the butt,
    — which is why we have a Calculator :rofl:

@Mace22

1 Like
3

Thanks Clint! :slight_smile:

4

Hi Marc

I admire traders who take due diligence to accurately work out the correct position size.

But seriously I find the KISS (Keep it Simple Stupid) principle works best for me. I never trade more than 0.5% of my capital on any one trade and I simply work that percentage out in the currancy that my account is in. IE Aussie Dollars for FX and USD Dollars for futures. This includes how many lots or contracts I take and where stop placement is.

I usually trade 2 lots or contracts and my account is such that I never risking more than that 0.5%.

Just one less thing to stress about.

Cheers
Blackduck

5

Thanks BlackDuck! :slight_smile:

1 Like
6

You’re welcome. I hope it helps.