calculating position size?

[olweiser]

I'm sure there are many threads on this subject, so sorry if its 'been done'

This is how I've come to understand how to know how much to trade:

position size = 1% of account size / (entry price - stop loss)

I get it like this: if I have a 5k account, then I only trade a max of 1% of that
So...if a stock is offering at $5 a share, if I put a stop loss at $4.90, then....
50(1%) / ($5 - $4.90) = 500 shares

Is this right? I don't understand that if I buy 500 shares as above *$5 that's $2500 - 50% of my account....??

How do I work out my position size on the forex?

 

[foredog]

you've invested $2500 but (in theory) with a 10c stop the most you will lose is 10c * 500 shares eg $50

Same for forex

risk 1% or $50

entry at 14801 stop at 14826 so you can trade $2 a pip

 

[olweiser]

thanks for this...
could we elaborate on the forex part. something simple:

gbp/usd
buy 1.5 stop 1.4; $50 / (1.5-1.4)= 500 (is this $100 a pip?)
500 what?
...i'm not understanding the difference between buying shares vs. forex?

 

[Rhody Trader]

You've proposed a 100 pip risk on the trade, and want that to be $50 in account value (1%). That means you take the 100 pips and divide it by the $50, giving you a $0.50 pip value for your position. The pip value of a GBP/USD mini contract is $0.10, so you could do 5 minis.

5 contacts x $0.10 pip value x 100 pips risked = $50 = 1% of your account.

 

[olweiser]

sorry Rhody, dont get that.

100 pips (is that 0.1?) if 1 pip is 0.001.
0.1/50=0.002 (2 pips or $2)

I think I mentioned earlier, the same calculation I understand for trading stocks as =500 means I simply buy/sell 500 shares at whatever price they are.

I dont see how the same formula works for the forex...500 of what exactly?

 

[Rhody Trader]

sorry Rhody, dont get that.

100 pips (is that 0.1?) if 1 pip is 0.001.
0.1/50=0.002 (2 pips or $2)

A pip is the smallest increment of price movement for a given currency pair. in the case of GBP/USD, that's 0.0001. Thus the difference between 1.49 and 1.50 is 100 pips.

I think I mentioned earlier, the same calculation I understand for trading stocks as =500 means I simply buy/sell 500 shares at whatever price they are.

I dont see how the same formula works for the forex...500 of what exactly?

In forex you have to know the pip value in order to be able to determine position size. Unfortunately, pip value is based on how large a position you take. That's why I used micro contracts in my example. One micro contract is 1000 units, GBP in the case. The pip value of a micro contract for GBP/USD is $0.10.

 

[olweiser]

Thanks Rhody,
dont think I'm gonna get this here....requires a pen,paper and plenty of time!

 

[Chorlton]

Is this right? I don't understand that if I buy 500 shares as above *$5 that's $2500 - 50% of my account....??

Yes, this is correct.

However, In reality, you would probably want to carry out a further check to ensure that the tot al investedin one particular trade (in this case 2.5k ) did not exceed x% amount of total capital, just in case the trade went very wrong as a result of gapping, a Black Swan event, etc.

 

[olweiser]

Whats wrong with my brain?
Can you clever people help me understand this. Hope you dont mind me putting my calcs here for you to examine.
trading shares:
$5k account
I see a stock price for $10 a share, I decide to buy.
1% of account ($50) / $10 - $9.90 (stop) = 500 shares. equivalent to $5k, but only $50 of my account....
1. If this calc above is correct, how do I work out my stoploss? (I guessed it for this)

taking this to the forex:
I'm assuming its more about pip size to calculate things?
So I decide to go long on the gbp/usd. I see its currently at 1.5500 (is that 5,500 pips?)
Using the formula I used before:
1% ($50) / 1.5500 - (stop loss) = ?

2. How do I work out the stop?

on a side note, when moving the stop as I lock in profit, is it a good strategy to keep it the same amount of pips away as I did from entry?

 

[Rhody Trader]

Your stop comes from your system or your analysis of the markets. It's not just some number. You should always determine you stop seperately from how much risk you want to take in a trade. In other words:
1) Know how much you want to risk.
2) Determine trade risk in pips/points (difference between entry and stop).
3) Figure out what the trade risk is for the minimum trade size you can put on
4) Divide the value from #1 by the value from #3 to get your position size.

Your problem with forex is in #3. In stocks you know the minimum trade size. That's one share. In forex you need to deal (probably) with fixed lot sizes that start at 1000 units for a micro contract. So what's the pip value for a micro contract? In the case of GBP/USD it's $0.10. Thus, if you want to risk $50 that means you could risk 500 pips if you trade a single micro contract ($50/$0.10). Extending that, if you determine your trade risk to be 100 pips, you can trade 5 micro contracts.

 

[olweiser]

sorry to keep revisting this, I keep going on to other things and getting distracted.

I'm only testing using an oanda account so far, so am not familiar with lot sizes and how these work.
I know there are micro lots (1000 units) that right?

so as an example using the USD as quote currency:
Eur/USD:
0.0001 * 1000 (micro) = 0.1 (10 cents a pip) If my account is in £'s then I should divide by current rate (£1/$1.4) = £0.07 (7 pence a pip)

Right so far?

If my account size is £100,000 and I'm only risking 1% then:

£1000 / £0.07 = 14285 pips OR 14 micro lots - is this right?

If my calcs are accurate above then, for each micro lot trade should my stop loss be around 1% of each lot? each lot in this example is £70. So my stoploss, at 1% is 10 pips on each trade lot??

hmmm.....

 

[foredog]

I think you've got it back to front a bit

You want to risk £1000 per trade, so that's 1000* 1.4 (or whatever the £/$ is)

so $1400

now determine where your stoploss is going to be (for example at the previous days high) so you want to put your stop 97 pips away (or whateverthe figure)

so now divide $1400 by 97 = so now you can trade $14 per point spread bet
1.4 lots ($10 per lot/pip)
140 mini lots (10c per pip)


So here's the simple way to do it

A work out how much to risk on any trade in the currency of the trade (gbpusd =$/ Eurgbp = £)

B Work out how many pips/points away from entry your stop loss will be

C Divide A by B, this is how many $/£ to bet.

D If using micro/mini lots multiply C by 10...if using full lots divide C by 10


example


A A/c balance £5000, risk 1% = £50 *1.4 = $70

B Buy at 13801 stop at 13766 so risk is 35 pips

C $70 / 35 = $2

D Mini lots buy 20 lots (£2 * 10)
Full lots buy 0.2 ($2 / 10) ----- probably can't trade in 0.2 lots so trade in minis.


If you're still confused post on here the hypothetical balance of your account and an actual trade you'd make with entry and stop points and the we'll calculate that for you.

 

[Rhody Trader]

I'm only testing using an oanda account so far, so am not familiar with lot sizes and how these work.

Oanda has a very handy tool that will allow to you determine your size precisely. Using it will probably help you understand the whole process. I link it's the Pip Profit Calculator, or something like that. You can access it through the menu bar, I believe under tools (don't have the platform open at this time, so I can't confirm).

 

[olweiser]

Thanks for this, it is an excellent example.

Can you explain more about lots: how are they structured?

"D If using micro/mini lots multiply C by 10...if using full lots divide C by 10"

If mini lots and micro lots are different, how come we use the same divisor of 10?

Here's a mock trade I placed this week with a £100,000 a/c.

eur/usd: BUY 1.3096, stop 1.2867.
(229 pip risk)

So:

£1000 (1%) * 1.4 = $1400 trade risk.

$1400 / 229 = $6.11/pip

mini lots = $6.11 * 10 = 61.1 lots
micro lots = $6.11 * 10 = 61.1 lots

full lots = $6.11 / 10 = 0.61 lots


Lastly, if my account is in £'s, then when I place the trade - it'll still be £1000 total risk in this example - yes?

 

[foredog]

Thanks for this, it is an excellent example.

Can you explain more about lots: how are they structured?

"D If using micro/mini lots multiply C by 10...if using full lots divide C by 10"

If mini lots and micro lots are different, how come we use the same divisor of 10?

Here's a mock trade I placed this week with a £100,000 a/c.

eur/usd: BUY 1.3096, stop 1.2867.
(229 pip risk)

So:

£1000 (1%) * 1.4 = $1400 trade risk.

$1400 / 229 = $6.11/pip

mini lots = $6.11 * 10 = 61.1 lots
micro lots = $6.11 * 10 = 61.1 lots

full lots = $6.11 / 10 = 0.61 lots


Lastly, if my account is in £'s, then when I place the trade - it'll still be £1000 total risk in this example - yes?

Mini/micro same thing i just used both as not sure whats the right term.

I'm not an expert on lots etc i trade shares normally.

Your calculation looks right to me.

And with the total risk it'll be roughly £1000 becasue the rate of exchange will have moved a little to stop you out, sometimes in your favour, sometimes not, but it should not vary the amount by more than a few pence.

 

[olweiser]

If I trade a larger pip risk, say 200, then the price per pip is smaller than say 100 pip risk. but still the trade risk is the same, 1%.

what's best approach? A smaller pip risk/greater pip size OR higher pip risk/smaller pip size?

 

[foredog]

If I trade a larger pip risk, say 200, then the price per pip is smaller than say 100 pip risk. but still the trade risk is the same, 1%.

what's best approach? A smaller pip risk/greater pip size OR higher pip risk/smaller pip size?

Both. Depends how you are trading. Day trading then you probalby want smaller stops larger size.

Longer term you want to have a larger stop to give the trade time to develop.

There is no right answer here, different methods have different stop strategies.

 

[olweiser]

Thanks,
now I've understood this better. Can someone help with this:
I have a short position on the gpb/usd: SELL 1.4125/STOP 1.4506 (381 pip risk)
Currently its trading at 1.4091(I get this as 34 pips in the black)

my account size (£) is 100,000, with 1% risk. I work this out to be £2.62/pip.

34 x £2.62 = £89.08 in profit.

Currently my profit, using oanda is around £2 - I don't get it?

 

[foredog]

How many units/lots have you sold?

what does the actual position size show with oanda?

 

[olweiser]

Its a test account, so I assume that no lots are sold in test conditions.
a position value of 2,709 - whats this? is it somat to do with inflating the account size to be able to trade (cant remember the exact terminology)

Units is 1000 (but I thought this was also £1000 or 1%)