# Question about position sizing when taking a short position

Hi all,

I’ve been going through the classes. One thing I’ve been struggling with is calculating position sizes when taking a short position. I think the problem might be that I don’t understand what is really happening when you take a short position.

My understanding is that when you BUY or go long on a position you are buying the base currency and then selling the quote currency at a later date. When you SELL or go short on a position, you are buying the quote currency and selling the base currency.

For example, if I’m trading 10 000 units of USD/JPY
BUY: Buying 10 000 USD with JPY loan. When I want to close the trade, I’m selling my USD back for JPY.
SELL: I’m buying 10 000 USD worth of JPY. When I want to close the trade, I’m selling the JPY back for USD.

Is this correct?

Onto my second question… when calculating position sizes based on the amount of your account you want to risk, do you use the same calculations for entering a long and short position?

The course on position sizing gives an example where your account currency is in USD and you are trading EUR/GBP. So you need to calculate the amount of your account you are willing to risk in USD, and then convert that amount to GBP as that is the currency your losses would be in.

This makes sense to me.

What I’m not sure of is how to calculate your position size when you are taking a short position. Are you still risking GBP when taking a short position? I thought you would be risking EUR because that is the currency you are buying. When calculating a short position I’ve been converting it to EUR, however I don’t think this is correct because I can’t get the numbers to line up…

Thanks for any clarification!

It seems your question is mixed and match,

Hope this helps,
Whether you are long or short, you just focus on the base currency.

If you think the base currency is stronger than the quote currency, then go long.

If you think the base currency is weaker than the quote currency, then go short.

I’ll answer the easy question first.

[quote=“briggs87, post:1, topic:130793, full:true”]

On to my second question… when calculating position sizes based on the amount of your account you want to risk, do you use the same calculations for entering a long and short position?[/quote]

Position size calculations are done exactly the same way for long or short positions. This is true for calculations done by hand, and for calculations done by the Position Size Calculator.

If you open up the Position Size Calculator and work with it, in order to understand what it’s doing, you will notice that it never asks you whether you are trading long or short.

Obviously, you are currently studying how to do position size calculations manually (without the Calculator). And that’s a good thing. When you’re a beginner, it’s important to know how and why things are calculated the way they are, before you take the shortcut of letting the Calculator do the work for you.

So, now let’s tackle the thorny part of your question.

[quote=“briggs87, post:1, topic:130793, full:true”]
My understanding is that when you BUY or go long on a position you are buying the base currency and then selling the quote currency at a later date. When you SELL or go short on a position, you are buying the quote currency and selling the base currency.[/quote]

Despite what the School lessons are teaching, there is no buying or selling of currencies, or currency pairs, in the retail forex business (our tiny corner of the huge, worldwide foreign exchange market).

Your broker doesn’t maintain an inventory of foreign currencies to sell to you, and he isn’t in the business of buying currencies from you.

Instead, he is in the business of taking the other side of your trade, whether long or short, at a price which he dictates. This places him in the position of counterparty to your trade, and he remains in this position until your trade is closed.

So, if your long trade does not involve buying the base currency and selling the quote currency, and if your short trade does not involve selling the base currency and buying the quote currency – as the School lessons incorrectly teach – then what exactly is happening when you place a trade?

Your trade is simply a bet on the direction that a particular price will move. And your broker simply holds the other side of your bet.

If you take a long position in EUR/JPY, for example, you are simply betting that the price of euro, as quoted in yen, will increase. And you are able to place this bet with your broker at any time during the 5-day trading week, because your broker has determined that he will accept your bet at a price agreeable to him. That price is called the ASK price (it’s the price your broker is asking, in return for the long position which you wish to take).

And, similarly, you can take a short position in that pair, or in any other pair, if you agree to do business at the BID price dictated to you by your broker.

So, at any given time, your broker is offering to take either side of any bet which you choose to place.

Confusion enters the discussion when these long or short positions are referred to as buying or selling. Those terms are perfectly valid in many other markets. But, they simply are not valid in our retail forex market. However, the terms buy and sell have been carelessly used by forex traders, forex brokers, forex teachers, and our own beloved School for so long, that we will never get rid of those terms. And, quite honestly, they are a convenient short-hand. It’s a lot easier to say “buy such-and-such”, than to say “take a long position in such-and-such”.

Consequently, we have misleading terminology, which we all persist in using, even though we know that it’s misleading. – As if this stuff wasn’t complicated enough, without being tripped up by misleading terminology!

So, when you take that long position in EUR/JPY – which everyone carelessly refers to as buying EUR/JPY – your account currency (whatever it might be) will never be converted into either EUR or JPY. You won’t buy or sell any foreign currency. And, for the entire duration of your trade, you won’t own anything except the balance in your account.

Let’s say your account is denominated in USD – that’s the currency you deposited into your account. In this example, USD is the currency in which all your account metrics (balance, equity, P/L, pip-values, etc.) will be reported to you. As we’ll see in the following example, pip-values in currencies other than USD must be converted (mathematically) into dollar-values.

Let’s stick with the example of a EUR/JPY trade in your USD-denominated account, and walk through the position-size calculation.

Let’s say you want to take a position in EUR/JPY (it doesn’t matter whether this is a long or short position), you want to limit your risk on this trade to \$10, and you want to set your stop-loss 50 pips away from your entry price. The only thing you don’t know yet is how large a position to enter. That’s what the position-size calculation is all about.

Your stop-loss limits your possible loss on this trade to 50 pips, and you want this loss (in pips) to correspond to a dollar-loss of \$10.

First, we have to determine what a pip is.

In this trade, JPY is the quote currency. (In fact, in any yen-pair, JPY is always the quote currency, never the base currency). Therefore, in this trade, a pip is 1/100 of one yen per unit of currency traded. And 50 pips is 50/100 of one yen, or ¥0.50 per unit of currency traded.

For a trader with a USD-denominated account, that’s not very usable information. So, we need to convert ¥0.50 to its equivalent in USD. For that, we go to the current USD/JPY exchange rate – let’s say it’s USD/JPY = 110.80 – and we calculate that ¥0.50 = \$0.0045126. In other words, one-half of one yen is a little less than one-half of one cent.

Now we can say that a 50-pip loss in EUR/JPY will cost \$0.0045126 per unit of EUR/JPY traded. And we want to know how many units of EUR/JPY to trade, such that a 50-pip loss will cost \$10.

We get the answer in one final calculation:

number of units of EUR/JPY = \$10 / \$0.0045126 = 2,216 units

If your account does not provide for trading in individual-unit-amounts, then you will have to approximate 2,216 units as, for example, 2 micro-lots.

We can confirm that the result calculated above is correct, by entering the appropriate metrics into the Position Size Calculator. After the result is calculated, it looks like this:

Notice that it was necessary to assume an account balance, and a risk percentage, corresponding to the desired \$10 risk amount in our example above. Any combination of account balance and risk percentage corresponding to that \$10 risk amount would produce the same result in the calculation. Play around with the Position Size Calculator, and prove this to yourself.

Notice also that – as said above – it doesn’t matter whether the trade being contemplated is long or short. 50 pips in the “wrong” direction (against your position) is all we’re concerned with, when equating loss to risk.

I’m aware that I have shown you a different way to do the position-size calculation, from the way presented in the School lesson. I hope that a different perspective will help to clear up your confusion.

4 Likes

No… this is twisted

it’s like this
let’s use USD/JPY

The first currency (USD ) is always 1
the second (JPY) is always at an exchange rate for the purpopses of calculation

now if you BUY USD/JPY

You are SIMULATANEOUSLY BUYING USD and SELLING JPY
now let’s say you it goes up by 10 pips and you take profit or you can close manually
but WHEN THIS HAPPENS

YOU NOW SELL USD and BUY JPY

that’s the agreement that you make with your broker when you open a trade

and if you were to SELL USD/JPY
you would be SELLING USD and BUYING JPY

so this statement

should have read
you are BUYING the base currency and then BUYING the quote currency at A LATER DATE

of BUYING THE BASE currency and SELLING THE QUOTE currency
and
SELLING THE BASE and BUYING THE QUOTE… AT A LATER DATE

you just mixed it up
that’s why your’e confused

if you go to the airport with USD and you are flying to japan
you exchange US dollars (YOU SELL USD) and they give you (YOU BUY) JPY

WHEN you come back into the country you SELL the YEN and get back (BUY ) USD
simple

yes…
but don’t do this
let’s say you have \$1,000 ACCOUNT BALANCE
and you want to risk 1%

DO NOT DO THIS…
1% x \$1000 = \$10
therefore you are risking \$10 per trade
because it’s not \$10

you need to do this

ACCOUNT BALNCE - NOMINAL MARGIN = FREE MARGIN
then
1% x FREE MARGIN = \$ X Per trade

but buying or selling the calculation is the same
and you need to figure out where to put your stop loss
and then

\$X Per Trade divided by Stop loss in pips = \$X PER PIP
then convert that to LOT SIZES
simple

stop confusing yourself
Listen… NICE AND SIMPLE

you are always paid IN YOUR LOCAL CURRENCY… ok
so calculate it in your local currency only

the reason why the numbers are not lining up is BECAUSE YOU ARE DOING YOUR HEAD IN hehe

Stop doing your head in for something that doesn’t matter

[quote=“Martin_K, post:4, topic:130793, full:true”]

now if you BUY USD/JPY

You are SIMULATANEOUSLY BUYING USD and SELLING JPY
now let’s say you it goes up by 10 pips and you take profit or you can close manually
but WHEN THIS HAPPENS

YOU NOW SELL USD and BUY JPY

that’s the agreement that you make with your broker when you open a trade

and if you were to SELL USD/JPY
you would be SELLING USD and BUYING JPY[/quote]

## This is total BS.

Caution to Briggs87, and all other newbies reading this thread:

The poster who calls himself Martin K does not know what he is talking about.

He poses as some sort of expert, but most of what he peddles on this forum is simply wrong.

Ignore him.

5 Likes

Thanks as always, Clint.

It can’t be said often enough. Which is both difficult and unpleasant to do, but still a “good service” to those less experienced.

The situation with Martin is really getting out of hand, in thread after thread. I just don’t know what to do about it. If anything. It puts me off posting here - and I’m not the only one.

Absolutely.

But there just isn’t a way stop him from doing it, apparently.

3 Likes

Ok, I think you guys cleared everything up for me. Thanks a lot for the help!

For long position or short position, position size calculation done. This could be possible manually or by the trading calculator. I prefer automatic process rather than manual calculation. In forex position sizing calculator trader do not need to provide the information of their trading size whether small or big. It’s really important for every trader to know about their position sizing for making profit. Otherwise you cannot differentiate the profit and loss.

You’re welcome mate
glad i could hlep

Don’t know what your speculating on but the rest of us use CFD’s. We’re not buying or selling anything but profiting on the change in price of the underlying instruments according to our bookies (sorry I mean brokers) terms and conditions.

Clint’s right you’re wrong but you are to emotional to admit that. Emotional, failure to admit mistakes, the need to be right, three qualities not fit for this game.

Love to start a poll on this one. Take note robot elders +1 here on that

2 Likes

Stop answering questions with over loaded answers which are never clear or correct in most instances - people are apparently here to learn and you’re not helping? You need to learn how to be direct and state when you’re not sure if your answer is correct in the first instance.

You were wrong with your above reply to Clint. So take it on the chin and have a think about why so many people are tired of your comments here… Numbers don’t lie

5 Likes

I know that your intentions are good, Martin.

But sadly that doesn’t help, and I’m afraid Bob’s totally right: the combination of being over-emotional, failing to admit that you’re completely mistaken, and needing to be right, really is one that rings loud alarm-bells for trading, and perhaps just as loudly for forum-posting, too.

We can’t go on like this, Martin. Surely you can see that?

As a sensitive person, you can surely see that 7 or 8 of us, each acting independently, are regularly intervening in threads to warn people that in spite of being well-intentioned, you’ve actually posted entirely mistaken information?

You surely can’t imagine that that’s just a coincidence?

It must occur to you that for so many people, on so many occasions, to be acting that way, there must be some kind of reason behind it?

Does it occur to you that apart from the complete beginners you’re trying to help, sometimes with wildly inaccurate information, there are also still some long-experienced traders here, ALL of whom feel that you’re really not helping.

3 Likes

Now you see… this is something i can work with as opposed to the useless stuff i usually get

so…

ok, I’ll work on clarity… ok
as for Correctness ITS’ DEBATEABLE… right ?
i mean… who’s to say i’m not correct
who’s to say i’m wrong

so it would help if the person who is saying i am wrong would clarify HOW i am wrong,
especially since in this case, it was such a basic concept

and i’ve been trading succesfully for years now… so , i can’t be all that wrong
facts are facts.

i don’t mind being proven wrong
but if i traded like this for years… then hey… that’s proof

now… if after all these years. I ACTUALLY GOT IT WRONG about 2 trades occuring when a trade is opened
OK… fair enough
but… has it affected how i trade or my success… NO
so should it be a major warning to newbies… NO IT SHOUDLN’T BE

all that should happen is… someone should correct me and explain why
especially since… i learned this stuff from babypips education tab around 7 years ago… so… yeah…
what can i say

if i’m wrong i’m wrong
if i misunderstood babypips, i misunderstood them
but i am still trading profitably regardless

so… there’s no need for rudeness from clint, but instead clarification would have been more helpful.

I accept this … 100%
and i’m aware of it and i’m working on it
I have no complaints here… ok
and i thank you for saying it

so… that’s my fault… i accept that
and for the record
my issue is
if i am direct and to the point. i find people keep asking more questions
so
what i then do is i answer them fully and correctly in the one question so that they don’t ask more

but, people don’t seem to know what they want
so if i answer briefly they say its’ not enough
if i expand they say its’ too much
i’m still trying to find the mid point

but, i am working on it… ok

ok, fair enough
but let’s take this instance
I WAS DAMN SURE i was correct

i still don’t know how i’m wrong about this point

so let me ask you this
how can i , or anyone know that we are MIGHT NOT BE CORRECT if we believe that we are ?
you can’t right

that’s why if someone’s finds an error with someone, they should point it out and explain why

like you said
we are here to learn, not to be abused

i accept that i may be
but clint was rude and didn’t explain anything

i can take it on the chin… not a problem
this is not a pride thing… i assure you
and have i thought about why so many people are tired of my comment YES I HAVE
but mate, in truth
so many others thank me for it as well
so… yeah

to me, it would appear that some people are tired of them and the length
others actually thank me for the time taken to write walls of text to explain stuff to them

so… how do you make everyone happy… YOU CAN’T.

but also
of those that are not happy

WHEN I ASK… WHY
they almost never reply

so… how do i fix it

YOU DID
THAT’S GREAT

but so many don’t
and then they complain as to why it continues

well… DUHH

so thank you for the input
ill work on it… ok

be cool
thank you

2 Likes

Without wishing to appear inflamatory @anon81929759, I think it may be wise to ponder a while on the QUALITY of the posters in this thread, who appear to be frustrated and critical and perhaps to understand that most of us now merely scan your posts and move on to the next one.

Also whilst yes you do get likes on around 1 in 4 of your posts, the QUALITY of those “liking” the posts is basically restricted to the veriest “Newbies” as a rule.

I do appreciate that the sheer Volume of your submissions, in both numbers and “wordage” significantly add to the chance of keeping input to the forum above “critical mass” - I’m really quite unsure as to whether that is the sole purpose of your submissions or not.

I can readily appreciate the criticism levelled at your postings by @Clint, @_bob, @LaughingCharlie, @RISKonFX etc who are all seasoned posters, whose opinions are highly regarded.

Really, unless you are only out to “Up the word count at any cost”, You really do need to address (by changing your attitude to) their concerns.

3 Likes

Increasingly many of us, when you very regularly make objectively, factually incorrect statements.

When you say things like “It makes no difference at all whether and where your broker’s regulated”, it makes my blood boil, and it makes me shudder, and I think it’s desperately bad advice, and extremely ill-informed and frankly pretty stupid, but I don’t even bother to debate it, because I know you’ll say it’s “opinion” and you’ll come back with a 5,000-word reply which just pisses everyone off even more, and helps nobody. I’m a realist and I know that there’s no mileage or benefit in trying to correct your ill-informed perspectives on issues like that.

I only correct your objective, factual misinformation.

There’s certainly enough of that about to keep a large number of us busy.

3 Likes

@LaughingCharlie
ok, i’ll try to keep this as short as possible

and did you read the fact that i approached ASIC and they did nothing.
so… it’s not opinion. it’s a fact
it means nothing when the regulators do not act
so why is your blood boiling
do you think i wasn’t upset when they did nothing ?

it’s not ill informed
it’s a factual experience that actually happened

it’s not opinion… it’s fact

i apologise for that , and I’M NOT TRYING TO PISS ANYONE OFF ok
i’m working on shortening my posts as much as possible,but sometimes it’s hard when people keep asking questions
ok

as am i

Mate, if you don’t share your knowledge , what’s the point of us being here ?

so in conclusion
i haven’t actually provided facutally incorrect information
it’s the opinion of you and a few others that it’s incorrect
that’s it

but i’m not trying to piss anyone off … ok
but i can’t force you guys to read the posts
but if you don’t then you won’t understand what i’m trying to say … will you

we need a solution here
and it’s certainly not rudeness
but so many of you seem to be rude
and i’m not being rude by saying this… I"m being factual ok

so if you have a solution… let me know

@Clint
you need to relax and get your attitude in check.

No one was being rude to you and you just came out and started with that crap
YOU’RE WRONG HERE MATE… accept it

@Falstaff

that’s ok… no problem, speak your mind

Fair enough, and i have, you can be sure of that
but mate, when those same posters seem to be nothing but rude, WHERE IS THE QUALITY

you said this…

Now the first 2
clint and [i won’t mention his name because i said in the past that i won’t for the sake of keeping the peace]
Mate, as experienced as they may be
they are just bloody rude… ok
and it has been my extensive experience that you will go nowhere with rude people
so those 2 are not credible
as for Charlie and Riskon FX

Charlie (i find hard to deal with , but i put up with charlie and sometimes the experience is good ) and other times i’ll ask him stuff and he won’t respond (which is pretty useless)
or he will be rude in a very subtle way… and WHY DO WE NEED THAT
so… i ignore it and put it aside
so… i don’t really have a major problem with charlie
but of late, he has been getting worse, i’m hoping it can be fixed

but those first 2… NO. it won’t happen

don’t really understand what you meant to say here
i’m sensing sarcasm , but i’m not understanding what you are trying to say.

well… yeah. of course it is, because the majority of people that i help are newbies
so… that makes sense
and if they like the response, then… what’s wrong with that

that’s the point isn’t it
to HELP THEM and so they APPRECIATE the help

tha’ts what i’m doing

Ok Martin, what I meant to say was ;

I thought the final paragraph, which you forgot to address in your post, should have helped with trying to assess my meaning. Why do you think I was attempting humour ?

thank you for the clarification
but if i can offer some advice…

Why attempt humour when it’s already confusing
that would only confuse it further which it has

so basically you said CHANGE MY ATTITUDE
and (respectfully) that means what ???

i mean i could take a guess and then you guys could say , No matin not that… right

can you see where this is confusing
i mean MY ATTITUDE is… I want to help
You want me to change that attitude
so… to what ???

you stated the posts are too long
you want me to change that.
I AGREED to work on it
it’s not like i’m not trying here after all the abuse i’ve received.

now what else could you mean ??
ok, maybe attitude towards HOW THE POSTS ARE ADDRESSED
ok.
but , common sense would say that , thus far i address every post in the way I BELIEVE it should be addressed
so saying “change your attitude” on this is not really helpful unless you get more specific

i mean let’s take the last one… right

the newbie asked about buy and sell on a currency pair
Now… that’s a pretty basic subject… right

now. i’m being told to change my attitude
YET… NO ONE AS YET HAS TOLD ME WHY I WAS WRONG hehe… see the problem

I’ve stated very clearly
i don’t mind being told i’m wrong
if i am it’s because of what i learned orginally on baby pips or it’s a misunderstanding somewhere

and what have i got in return…

• Abuse
• No Clarification

so… Not very helpful

Mate, i’m trying ok
I"m trying to make you guys happy so that this works out well
but you can’t ask me to do something when it’s not clear on what you want
I’m not a mind reader

so… a little help… if you could.