# Trouble undetrstanding Position Sizing

I’m in the process of writing out my trading plan and I reached the section about risk management but I think it’s poorly explained in the school of pipsology. So according to the school of pipsology example calculations on position sizing this is what we need to determine our position sizing:

• Account equity
• Which pair are we trading?
• The percent that we are willing to risk.
• Stop loss in pips
• Conversion currency pair exchange rates

So for me:

1. 100k USD
2. EUR/USD
3. 2 %

For number 4 I get confused. If I’ve already said that I’m willing to risk 2 %, wouldn’t I calculate my stop loss as follows:
2 % of 100k = \$2000

Trading standard lots where 1 pip = \$10, thus 10x=2000, x=200 pips. I am willing to risk 200 pips.

But when I look at the example calculations with Ned he decided how many pips he wanted to risk just arbitrarily saying 200. He then goes on to calculate something that he calls “value per pip”, what the heck is value per pip?! Isn’t the value per pip determined by which type of lot you are trading (standard 10, mini 1, micro .1)?!

Furthermore, when he says that he is willing to risk 200 pips - does that mean he sets is stop loss 200 points from his entry?

//JT

Further question, say I choose to swing trade with 200 pips at risk, same account as above. When I calculate it I get

Position size 100,000
Standard lots 1

What am I supposed to do with this information, I don’t get it at all. So if I choose to move in on a trade with this information, what good is this for me?! How do I use it?

The pip value is different from pair to pair… in some pairs it is very small so you would have to put a lot more leverage to gain the equivalent of, say, EUR/USD pip value.

Hi @J_T, If you had a \$100,000 account, I would suggest dropping your risk back to 0.5% (\$500.00), 0.25% (\$250.00) or even less! 2% risk is just too much to give to the market when your starting out…others will tell you the same.

A similar question came up a few days ago, the post below may help you.

Generally, the larger the Stop Loss ie: 200 pips the smaller the Lot size…

@PipMeHappy has covered calculating Pip value for each currency and pair…

Hope this is of some help…

2 Likes

I completely agree.

Others who know what they’re talking about, yes.

Realistically, this is a beginners’ forum, and there may be some who don’t.

2 Likes

ok
here is a scenario.

HERE IS THE CHART

THE CURRENT PRICE IS 1.22580
YOU WANT TO PUT YOUR STOP LOSS AT 30 PIPS

QUESTION : WHAT PRICE DO YOU ENTER INTO THE TERMINAL FOR YOUR STOP LOSS ?

ANOTHER QUESTION
WHAT LOT SIZE ARE YOU PLANNING TO USE FOR THE TRADE ?

Answer these 2 questions for me… ok

for now

• Ignore the required margin

i just want you to understand the concept
lets see how you figure this out

First of all a general answer to everyone - No I’m not jumping in with 100k like a headless chicken. It’s a practice account :).

Now as for my question - I don’t need help with calculations - I have already gone through them and they are trivial. What I do not understand is the logic behind the specific question that I asked.

Now to the questions, purely hypothetical numbers. Let’s say I’m trading standard lots at an account balance of 100k. I’m willing to risk 1 % at 30 pips.

1 % of 100k = 1000 USD

1000 USD / 30 pips = 33.3 USD/pip

33.33 (100,000 / 10) = 333,300

So I enter the stop loss at 1.2228
lot size is 333,300
each pip is about 33 bucks.

and my GENERAL question to you is… if you have it , WHY ARE YOU NOT ?

an Account with \$100k with good risk management and trade planning can take you a long way
Why are you not jumping in with 100k
is it because it’s \$100k ?

now… yeah …ok
so since you worked out that 1% over 30pips is \$33 Per pip
what do you not understand ???

do you not know how to calculate lot size ?

IF SO
HERE IS A QUICK GUIDE

0.01 LOTS = 10CENT PER PIP
0.10 LOTS = \$1 PER PIP
1.0 LOT = \$10 PER PIP

HENCE \$33 PER PIP WOULD BE 3.3 LOTS

beyond this… what do you not understand ?

Hi JT,

The important point is that you need to work out your stop-loss size FIRST, from the chart, from the volatility, from the support and resistance levels, from your trading-plan, from however else you work it out, and THEN work out your position-size using the stop-loss distance (risk exposure) parameter to calculate it, NOT the other way round.

4 Likes

@J_T
that’s right
@LaughingCharlie is correct

does it make more sense now ?

What I don’t get is what the heck the numbers mean. What does 333,300 represent? 3.3 standard lots, what does that mean?! A lot size is 100,000 for standard lots, right? I’m not buying 3.3 standard lots, not even with leverage, I’m just investing \$1000.

It represents 333,300 units of base currency.

In forex you trade currency pairs. The first currency is the base currency. The second currency is the quote currency AKA the counter currency.

• If you trade 100K EUR/USD this position has a face value worth 100,000 euros.
• If you trade 100K USD/JPY this position has a face value worth 100,000 US dollars.

In that case, consider trading only one micro lot (1000 units of base currency) per trade to start.

You may find this earlier discussion helpful: Pip value for 500 bucks on metatrader 4

@J_T

You’re confusing yourself

everything UP TO THIS LINE

you keep
everything below it … get rid of it
it’s confusing you

now after this line

you know 1 pip = \$33.3 bucks
that’s easy

now you need to convert to LOTS or LOT SIZES
a LOT SIZE is a standardized unit of measure for CONTRACT SIZES

1.0 Lot = \$10 per pip = Contract size \$100,000 Units of Currency
0.10 Lots = \$1 per pip = Contract size \$10,000 Units of currency
0.01 Lots = 10cents per pip = Contract size \$1,000 units of currency

it’s just a standardization , that’s all
you just need to work out \$ per pip
then to place a trade CONVERT THAT TO LOT SIZES and place the trade

and SO LONG AS YOU DON’T MOVE THE STOP LOSS LINE AFTER PLACING THE TRACE
and ON THE CONDITION THAT YOU MATH WAS CORRECT

you will not risk more than what you planned to risk, which is the point at the end of the day.

does this help

Thanks, I think it makes sense now. Although I gotta say, my biggest take home from that earlier discussion is that Jamall is an idiot - but at least it made me laugh.

hehe, whatever tickles your bubble mate, hehe[quote=“J_T, post:14, topic:135444”]
Although I gotta say, my biggest take home from that earlier discussion is that Jamall is an idiot - but at least it made me laugh.
[/quote]