Problem with position size calculation

Beginner Questions
1

Hey everyone. As you can imagine i am new here. I was reading the link below about calculating position size when your account denomination is the same as the counter currency. in the example provided, newbie ned finds the value per pip, which is 0.25. Then he multiplies it by 10,000. Why does he have to multiply it by 10,000? why not another number? Thanks.

2

Hey Luis,

I agree with you that the way the position size is calculated in the Ned example is confusing, because of the way it is formatted. However, it is correct, and we can illustrate that fact by showing the calculation in a different way.

We tend to think of a “pip” as just the last digit in the 5-digit price of a currency pair. In other words, it seems like it’s just sort of a dimensionless number which somehow measures a price move.

Actually, in any particular pair, a pip is a fraction – one ten-thousandth, to be precise – of the quote currency.

That means that it has the same units – USD, EUR, GBP, whatever – as the quote currency.

So, in the Ned example, one pip = $0.0001 per unit of EUR/USD (or any other pair of the form XXX/USD). That is, pip = $0.0001/unit

It’s also correct to say,

  • one pip = $0.10 per 1,000 units, or pip = $0.10/1,000 units = $0.10/micro-lot

  • one pip = $1 per 10,000 units, or pip = $1/10,000 units = $1/mini-lot

  • one pip = $10 per 100,000 units, or pip = $10/100,000 units = $10/lot

Therefore, alternative ways of showing the position-size calculation in the Ned example could be as follows –

Using the equation pip = $0.0001/unit

Using the equation pip = $1/10,000 units

Finally, when you are totally familiar with these calculations, you can take some shortcuts. In most trades, you can figure your risk amount in your head. Without using a calculator, you know that 1% of $5,000 is $50, for example.

And, when your account currency matches the quote currency of your trade, as in the examples above, you can convert your stop-loss (in pips) to its actual value (in terms of the quote currency) in your head, as well… In the Ned example, 200 pips = $0.0200

Then one simple calculation on your pocket calculator, or keyboard calculator, gives you the position size you are looking for:

Position size = $50 / $0.0200 = 2,500 units

2 Likes
3

extremely helpful. Thanks Clint.