Here i am again after i have rested for the night and mine head is capable to think clearly:)
I had the famous “AHA” moment like Newton did when apple has banged his head:D
So now i am able to explain what was mine point yesterday.
We are going to work it out through examples.
So here we go…
Example 1:
We have opened an $ mini account with 10 000 deposit.
As we are followers of strict money/risk management rules we do not want to have position in total bigger than 30 000$ at any given time.
Other words our true leverage should not be bigger than 3:1 at any given time.Our true leverage is calculated by divideing total position size with account size.
Now we can not wait to trade any more so we wanna open USD/JPY position where exchange rate is lets say 109.00.We are going short one lot.
Which means that we are selling base currency(USD) and buying quote currency(JPY)
-10 000$ +1 090 000 JPY
So basically we have bought 1 090 000 JPY but still our position is worth 10 000$ which means that our true leverage is 1:1(10 000/10 000=1)
That is so when $ is base currency.One mini lot will always be worth 10 000$ in $ or in currency for which we have exchanged $.
But what will happen if USD is quote currency?
The story gets pretty much different!
Example 2:
We have opened an $ mini account with 10 000 deposit.
As we are followers of strict money/risk management rules we do not want to have position in total bigger than 30 000$ at any given time.
Other words our true leverage should not be bigger than 3:1 at any given time.
Again we can not wait any more,we wanna some action!
We wanna trade EUR/USD,one mini lot @ lets say 1.4700 and we are going short.So we are
-10 000 Euro +14 700 Dollar
Wait!WTF is going on now??
As USD moved to be the quote currency size of our position got bigger!
Although we have shorted 1 lot(same as in USD/JPY example) our position size got bigger which means that our true leverage got bigger too and now amounts 1.47:1(14 700:10 000)
This is still ok according to our “3:1” rule.
But till now i did not understand this so i have thought that what i need to do is just not to trade more than 3 lots at any given time.
Buying 3 lots of EUR/USD in above example would mean that i would violate mine “3:1” rule because mine total position size would be 44 100$(14 700x3)
and mine true leverage would be 4.41:1 which is 1.41 lots more than allowed.
The point is that when USD is base currency 1 lot will always be equal to 10 000$(if we trade mini lots) ,BUT,
when USD is quote currency you always must calculate your position size according to current exchange rate!
I thing that it is very important thing to know for all of us who are following very strict risk/money management rules.
I think that i got it 100% right.
But in the case that i have stated something wrong please feel free to correct me!
Also i hope that this will help other members as i think that good risk/money management is second most important thing to be successful in the long run when it comes to trading.
Regards!
VingTsunKuen
