Slightly different question about margin

Beginner Questions
1

If someone can help with this I’d really appreciate it.

Whilst demoing with fxcm, if I make a trade they take the margin from my account which leaves me £X amount.

Whilst the trade is ongoing, my account balance(previously £x) goes up or down according to how well the trade is going.

If the balance reaches a certain amount FXCM will stop the trade.

So my question is this:-

If I have a sl which = my tp(so my R:R = 1:1), how can I work out the MAXIMUM lot size I can trade with the account balance I have?

I’m not interested in how to work out how to trade 2%, I need to know the MAXIMUM I can trade.

BTW I realise that this trading amount would be suicidal!!!

Many thanks

2

[B]Hi, Toka[/B]

I’m glad that you realize that this would be suicidal.

Here is the answer to your question.

Let’s say that:

[ul]
[li]your account balance is [B]5,000 GBP[/B]
[/li]
[li]you trade [B]mini-lots[/B] (10,000 units of base currency)
[/li]
[li]for this particular trade, you will trade the [B]GBP/USD with a 40-pip stop-loss[/B]
[/li]
[li]pip-value, based on the current ASK price of the GBP/USD, is [B]0.625 GBP per pip per mini-lot[/B]
[/li]
[li]your broker’s margin is [B]100 GBP per mini-lot[/B] (this corresponds to leverage = 100:1)
[/li][/ul]

Here are the variables you need to solve this problem:

[ul]
[li]Account Balance = 5,000
[/li][li]Margin = 100
[/li][li]SL = 40
[/li][li]Pip-value = 0.625
[/li][/ul]

Skipping the algebraic derivation, here is the formula for the maximum number of mini-lots which can be traded, based on the assumptions given above:

[B]Position Size < [Account Balance] / [(Margin) + (SL) x (pip-value)][/B]

Substituting numerical values into the formula,

Position Size < [5,000] / [(100) + (40) x (0.625)]

that is,

Position Size < 5000 / 125

Position Size < 40 mini-lots (position size must be less than 40 mini-lots)

Therefore, 39 is the maximum number of mini-lots you can trade, in order for your SL to be hit before you receive a margin-call.

One question: since you know that this is a formula for suicide, just exactly what do you plan on doing with this information?

Clint

3

Recommend it to someone I dont like :D:D:D

Only kidding.

Firstly…Wow. Thanks for such a detailed answer, its EXACTLY what I was looking for.

I just wanted to know what my options are related to trading amounts.

If I understand your workings correctly then, in your example above, I would either make or lose

390.62540= £975 (assuming my tp was also 40pips and ignoring spread)

And if my leverage was 200:1 instead, my margin would be £50 per mini lot?

4

One other thing. Don’t forget that the pip-value changes continually, as the price of the currency pair changes — unless the GBP is the cross-currency (pairs of the form XXX/GBP), in which case the pip-value is 1 GBP per pip for mini-lots. You can get pip-values from your trading platform, or from an online pip-value calculator.

The pip-value changes slightly from the opening of a trade to the closing of that trade, but this slight change is not large enough to enter into the calculations of the Suicide Formula.

Cheers.

Clint

5

Thats fantastic mae thanks very much.

If you dont mind, I think I will forever refer to this equation as:

The Suicide Formula

:D:D:D