Forex Position Sizing Calculation & Leverage?

[MktScape]

Hello Everyone,
I was working toward making a spread sheet for position sizing in Forex trades. I have been able to put together the following calcualtions by listing to and going through some reliable resources:
Equity 5000
% Risk 1%
Risk $ 50
Stop Loss Pips (Entry-Stop Loss) 20
---------------------------------------------
Lots to trade calculation
Cost per Pip 2.5
Lot Size = Cost Per Pip / Price Per Pip 2.273 (Price per pip needs to be checked online)
-------------------------------------------------------

My questions is that none of the calculations take into account the affect of ones account leverage in coming up with a position size? How the position size would be affected with leverage of say 50:1 ot 100:1. If leverage consideration is not needed as in the above calculation then how does leverage be incorporated into position sizing strategy?
I hope i am not confusing myself !. Can some one help me understand as to why is it like that. I am trying to understand this concept in detail.

Any help would be much appreciated.

Thanks
Any help

 

[Rhody Trader]

The only way leverage (speaking permissible, not employed) comes into the position-sizing determination is to constrain it (position too big). Aside from that, you're only other consideration is the margin requirement.

 

[DAM]

I was struggling with this same thing yesterday

I used this article, but it does not explain everything, and almost drove me to insanity http://www.forexfactory.com/showthread.php?t=7439

But I figured it out eventually.

I altered how it was written to be like this:

2% risk of a $100 account = $2

You should adjust your stop loss so that you never lose more than $2 per a single trade.

Place your stop loss 30 pips below/above your entry point.
30 pips = $2
1 pip = $0.07

The size of your trade should be adjusted so that you risk $0.07/pip. Your trade size will be $700 (0.07 x 10,000)

If the trade is stopped, you will lose $2 which is 2% of your balance.

With 50:1 leverage, this trade will require $14 = 14% of your balance.

 

[DAM]

So adjusted for the information you provided:

1% risk of a $5000 account = $50

You should adjust your stop loss so that you never lose more than $50 per a single trade.

Place your stop loss 20 pips below/above your entry point.
20 pips = $50
1 pip = $2.50

The size of your trade should be adjusted so that you risk $2.50/pip. Your trade size will be $25,000 (2.50 x 10,000)

If the trade is stopped, you will lose $50 which is 1% of your balance.

With 50:1 leverage, this trade will require $500 = 10% of your balance.
With 100:1 leverage, this trade will require $250 = 5% of your balance.

 

[DAM]

So as you can see, leverage effects the amount of your margin required to enter the trade

 

[Rhody Trader]

So adjusted for the information you provided:

1% risk of a $5000 account = $50

You should adjust your stop loss so that you never lose more than $50 per a single trade.

Place your stop loss 20 pips below/above your entry point.
20 pips = $50
1 pip = $2.50

The size of your trade should be adjusted so that you risk $2.50/pip. Your trade size will be $25,000 (2.50 x 10,000)

If the trade is stopped, you will lose $50 which is 1% of your balance.

There's a bit of a mixed message here. The latter part deals with adjusting position size based on placement of your stop, which is proper. Before that, though, you say "adjust your stop loss...", which isn't good advice. Set your stop based on whatever criteria you're using, then determine your trade size.

 

[DAM]

There's a bit of a mixed message here. The latter part deals with adjusting position size based on placement of your stop, which is proper. Before that, though, you say "adjust your stop loss...", which isn't good advice. Set your stop based on whatever criteria you're using, then determine your trade size.

I was just plotting in his info as per the formula stated in the article, change the numbers as one sees fit

 

[MktScape]

Thanks for your help guys .... I also found the attached MM Spreadsheet on T2W forum i did some research to verify the calculations and they are ok. On the same spreadsheet , in the last line, why the Pip value is being calcualted again?

Also, I am trying to understand that once we have calculated the # of lots to buy based on our stop loss, % risk tolerance, then why the following is being mentioned in the calcs:

"In order to respect your MM you have to take the following position:"
Leverage * Account S. $10,000.00 <---??


Thanks

 

[Pippy5000]

You shouldn't choose generic stops based on your margin. Certain pairs require larger stops than others.

i.e. A 20 pip stop on UJ would be fine, but a 20 pip stop on GJ would probably harm you more often than help. Other pairs like GBP/AUD would be stopped out almost immediately based on the spread alone.

Also, sometimes it can be very beneficial to use a larger than average stop in order to take advantage of multiple levels of support or resistance in near proximity.

Risking 2% - 3% of your margin on a trade is just fine.. It doesn't have to equal exactly 2.77% or 2.5% or whatever each time. Just keep your risk reasonable.

 

[DAM]

Agreed

Found this formula just now. Spits out the same numbers as what I described in my previous post, but is a lot cleaner. I'm sure this is pretty common knowledge to more experienced traders.

Position Size = ((account value x % risk per trade)/pips risked)/pip value per standard lot

Gives you a number like 0.25 or 0.80 etc. which is the amount of a standard lot ($100,000) that your position should be. So with 0.25, $25,000 or 0.80, $80,000

 

[DAM]

From: http://www.fxstreet.com/education/learning-center/unit-3/chapter-3/the-position-size/

 

[Orange Juice]

I didn't really want to start a new thread for this, but what's the minumum suggestible amount to open a mini fx account?

 

[MktScape]

I didn't really want to start a new thread for this, but what's the minumum suggestible amount to open a mini fx account?

A newbie should start with a Micro Account and come up with some small initial deposit say $1000 and work their way up the learning ladder. But before you open any live account make sure to practice you trade strategies(this includes chart monitoring, trade identification, Applying Money Mgt, Trade Management, Exit Managment + Keeping a Trading Journal) on Demo first for 3 months (or more) and be profitable for this period then only put any real money even if it is $1000 or less. Brokers offering Mico account will allow you to open an account with as low as say $300 (diffrent broker have different cut offs)

 

[DAM]

Does your broker allow for flexible lot sizes? If so, then determine how much you have to put up and go from there. If there is a minimum lot size with your broker, then you have to keep this in mind.

Size of lot depends on size of account, larger your margin, larger your trades.

 

[MktScape]

You shouldn't choose generic stops based on your margin. Certain pairs require larger stops than others.

i.e. A 20 pip stop on UJ would be fine, but a 20 pip stop on GJ would probably harm you more often than help. Other pairs like GBP/AUD would be stopped out almost immediately based on the spread alone.

Also, sometimes it can be very beneficial to use a larger than average stop in order to take advantage of multiple levels of support or resistance in near proximity.

Risking 2% - 3% of your margin on a trade is just fine.. It doesn't have to equal exactly 2.77% or 2.5% or whatever each time. Just keep your risk reasonable.

Hi,
Regarding your comment on Stop Loss...I need to calrify something with respect to stop placement on a Forex chart ....say I enter into a trade at a major support level where there are other confluencing factors as well now ...my strategy being a conservative trader would be to wait for a price confirmtion breakout from the support area and if price moved sideways for a bit befor breaking out then should i place the stop at the new support level (previous resistance i.e. before breakout) or the previous support level where the price stopped before turning around?

 

[Pippy5000]

There is no one size fits all answer to this. It really depends on how major the s/r is and what your overall strategy is.

If the s/r you're playing is significant (like a fib level on the weeklies) then I would be tempted to hold the trade and I wouldn't move the stop up until the trade found some breathing room. Otherwise you run the risk of smothering a trade which could have gone for a lot more.

If I was only going for 30 pips after a relatively minor s/r held (like a short-term triangle) with a limit order or broke with a stop order I would take profit on a bounce or failure at the next s/r encountered and decide whether or not I wanted to re-enter again with a stop above the s/r or a limit around the point of the original breakout. There's no point in betting on a minor s/r holding twice or sustaining a breakout when you're in profit on a trade and it starts to come back on you.

However, understand that my stops are tiny to begin with. If you use large stops I'd recommend moving the stop up each time a new s/r breaks, but keep it 2 s/r levels behind spot to avoid smothering the trade in your sleep. Give it a little breathing room if you're trying to hit a home run and won't be around to watch the trade all day.

On EU breakouts my entry is usually 8 pips above the breakout level thereby making my stop 10 pips below the breakout level with a 20 pip stop including the spread.. this allows spot to fall back a bit after a breakout without stopping you out. If you try to grab 40 with a 20 pip stop you only need to be right 1/3 of the time to have a successful breakout strategy.. If you only play medium to major breakouts you should easily be able to accomplish a 33% win ratio.

 

[quantisan]

I published a real-time (end-of-day data) forex position sizer spreadsheet that I use. It is available online at http://www.quantisan.com/tools/forex-position-sizer/

The table calculates each currency pair's volatility in the past 45 days and derive a recommended max. unit size based on an at-risk amount. The table also takes into account different home currencies and convert the units using an "at risk" amount in your own currency. It's all explained on that link above if anyone's interested.

Just thought I'll throw this out to save you some time in working this out.