POSITION SIZING computation. HELP. I'm getting insane!

Hi forex peeps,

Finished all the courses in Pipsology school and been on demo accounts for a month now. I just have a question I’ve always been confused in. Appreciate if someone can help me.

[B]HOW DO YOU COMPUTE FOR THE POSITION SIZE IF BASE CURRENCY IS USD AND COUNTER CURRENCY IS JPY???[/B]

I know there are position sizing calculators around but I don’t want to blindly use those. I want to have a mental grasp on the computation. Repeatedly checked Pipsology school and other websites but to no avail. MY COMPUTATION DOESN’T MATCH WHAT THE CALCULATORS SHOW. HELP, I DON’T KNOW WHERE MY MISTAKE IS.

Firstly, I know the formula when [I]USD is the base currency[/I] is:

[B](account balance x risk percentage x counter currency conversion rate) / stop loss in pips

then multiply the resulting amount by the value per pip[/B]


This formula seems to work with pip movements of 0.0001 for example:
[I](I have color coded some of the numbers so you can easily and visually track where it came from)[/I]

USDCAD 1.33358
Account Balance of USD 5,000
Risk Percentage of 10.00%
Stop loss in pips of 50 pips

(5,000 x 10.00% x 1.33358 ) / 50 = 13.3358

13.3358 x (pip value of 10) = 133.358 or [B]1.33 lot[/B]

THIS IS CORRECT EVEN IF COUNTERCHECKED WITH BABYPIPS FOREX CALCULATOR.


[B]But when I use this with JPY. I DON’T KNOW BUT THE FORMULA MALFUNCTIONS LIKE MY BRAIN!!!

[/B]EXAMPLE:

USDJPY 120.55
Account Balance of USD 5,000
Risk Percentage of 10.00%
Stop loss in pips of 50 pips

(5,000 x 10.00% x 120.55 ) / 50 = 1,205.5

1,205.5 x (pip value of 1,000) = 1,205,500 or [B]12,055 lots!!![/B]

This can’t be because when I checked with Pip calculator, the position size should be 120,550 units or [B]1 lot[/B]!!!

[B]PLEASE HELP ME, I CAN’T FIGURE THIS OUT I’M GETTING INSANE!!! :17: :17: :17: :17: [/B]

[I]*BTW, this is how I arrived with the value per pip = (pip size x lot size). So with the USDCAD example, value per pip was computed as (0.0001 x 100,000). Okay? With USDJPY, I computed it as (0.01 x 100,000).[/I]

[U]I see 3 issues with your calculations.[/U]

[B]1.[/B] I don’t understand the formula you are using. Does that come from the School?

Here is the formula I use:

[B]Position size = Risk, in dollars / [(Stop-loss, in pips) x (Pip-value, in dollars)][/B]

In most cases, you will need to calculate “risk in dollars”, and “pip-value in dollars” first, and then plug those values into the formula.

[B]2.[/B] You are not calculating pip-values correctly. HERE is a post containing a table of formulas for calculating pip-values in a USD-denominated account.

Using this table, for the two examples in your post, we get:

• for USD/CAD, 1 pip = $10 / 1.33358 = $7.4986 per standard lot

• for USD/JPY, 1 pip = $1000 / 120.55 = $8.2953 per standard lot

Applying these pip-values, and your $500 risk amount, to the formula I suggested above, we get —

• for the USD/CAD trade: Position size = $500 / [50 pips x $7.4986 per pip] = 1.33358 std lots

• for the USD/JPY trade: Position size = $500 / [50 pips x $8.2953 per pip] = 1.2055 std lots

[B]3.[/B] You have chosen an unfortunate combination of numbers in your example, resulting in a strange coincidence: specifically, in your USD/CAD example, the position size comes out looking exactly like the USD/CAD exchange rate; and in your USD/JPY example, the CORRECT position size comes out looking like the USD/JPY exchange rate divided by 100.

You can get rid of this odd coincidence by changing either your risk percentage or your stop loss. Suggestion: change your percentage risk to, say, 6% and your stop-loss to, say, 45 pips, just to eliminate some confusion. Then, do some more calculations with the formula above, and check the results with the Babypips Position Size Calculator.