How To Calculate Your Position Size Forex

How to calculate your position size forex

How to Calculate the Perfect Forex Position Size

Having the correct position size in trading is an essential part of risk management. Before taking a trade you should know how much you’re risking, in both monetary terms and a percentage of trading funds.

This monetary risk is the amount you stand to lose if price tags your stop loss before you make your trade risk free.

In this article, I’ll explain how to calculate your position size for both stocks and Forex so that you know your trade has a small pre-determined limited risk in line with your risk management rules.

Establish Entry & Stop Loss

After you’ve conducted your technical analysis and found a valid trade setup for your trading strategy, you must then establish the entry and stop loss prices.

These levels should be easily identified from simple rules in your trading plan.

Once you have these levels you must calculate the difference in price between the two.

So, for a long trade you would take your stop loss price away from your entry price.

How to Calculate Your Position Size

As a simple stock trade example, if your stop loss is at $95.00 and your entry is at $102.00, then your risk amount in points is 700 (700 cents or $7.00)

Establish Your Monetary Risk

Next you must identify the monetary amount you want to risk on the trade. This should not be more than 2% of your total trading equity. So, say you have a £50,000 trading account and you’re risking 1%.

How to calculate your position size forex

Therefore your risk amount is £500. (50,000 x 0.01).

Spread Betting Position Size

For spread betting, your next step is to find out how much you’ll be risking per point. To do this you must divide £500 risk by $7.00.

How to calculate your position size forex

(500/700 (cents) = 0.71). So you will be risking £0.71 ($0.91) per point and this is what you enter into your brokerage account if you’re spread betting.

Below is the above example in my spread betting account.

How to Calculate Your Position Size in Different Forex Pairs and Account Currencies

The order ticket shows my order to buy Apple at $102 with a 700 point stop loss, which gives me a monetary risk of £497.

Buying Shares

If you’re trading US stocks, as in the example then you must figure out your monetary risk in USD.

This is $639.60 at time of writing (GBPUSD exchange rate is 1.2792 as of 5th Dec 2018.

How to calculate your position size forex

£500×1.2792 = $639.6).

If you’re not using a spread betting account then you’ll need to figure out how many shares you want to buy if you’re trading stocks. (I’ll explain Forex later).

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As with the above example of £0.71 point value.

Next calculate your stop loss as a percentage of the stocks price.

(95/102)x100 = 93.14

100-93.14=6.86%.

So the difference between your entry and stop loss is 6.86% of the stocks price.

Next find out what 6.86% of the buy price of £102 is.

($102 x 0.0686 =$6.9972 risk per share).

Next you want to divide your monetary risk in USD (because you are buying US shares) by $6.9972.

$639.60/$6.9972 = 91.41. So you want to buy 91 shares at $102 with a stop loss at $95. This will give you a monetary risk of £500 or $639.60.

Forex

With Forex the price scale is different.

Spread Betting Position Size

Most Forex pairs have 4 decimal points, with exception of JPY pairs which have 2 and exotics which may differ. For example EURCHF at time of writing is at 1.1317.

Another thing to note is that Forex price moves in pips rather than points as with stocks. The 4th decimal place in the Forex pair’s price is one pip.

For spread betting the same as above applies. First find your monetary risk and your entry and stop loss prices.

Let’s say you want to short sell EURCHF at 1.1300 with a stop loss at 1.1400.

Based on this your pip risk is 100 pips (11400-11300=100).

So to find out your £ per pip position size, just divide your monetary risk by the number of pips. (£500/100=£5).

So you’ll be risking £5 per pip of price movement and this is what you enter into your entry order with your spread betting broker.

Below is an example of an order ticket in my broker for the above example.

Calculating Position Sizes

My order is to sell at 1.1300 at £5 per pip with a 100 pip risk amount.

Lot Sizes

Lot sizes are used if spread betting is not.

For exmaple, CFD accounts will likely use lot sizes with Forex. Lot sizes will depend on the size of your trading account. For smaller accounts you’ll deal with micro lots (£0.1 per pip or 1000 units worth of currency).

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Larger accounts will deal with mini lots (£1 per pip or 10,000 units of currency). The largest lot sizes are  standard lots which are worth £10 per pip or 100,000 units of currency.

If you’re not spread betting then you’ll need to calculate how many lots you want to purchase (or short sell) This will depend on the value of 1 pip for the currency pair you wish to trade.

If your account currency is the same as the second currency in the pair (quote currency) then the lot size conversion will be as above (£0.1 micro, £1 mini, £10 standard).

However if not then the currencies will need converting to find the pip value.

If your account denomination is the same as the counter currency…

For example if I am trading the EURGBP with a GBP funded trading account, then a £5 per pip position size will equate to 50 micro lots, 5 mini lot or 0.5 standard lots.

However if i’m trading EURCHF as in the above example I would need to convert my £5 per pip to the equivalent in CHF. The exchange rate of GBPCHF is currently at 1.2688 at time of writing. (5×1.2688 = 6.344). This means that your position size would be 63 micro lots, 6.3 mini lots or 0.63 standard lots.

Example

To give another example, let’s say I want buy AUDNZD at 1.0550 with a stop loss at 1.0450 with a GBP funded trading account.

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Let’s say my account is £10,000 in size and I want to risk 2%.

10,000/0.02 = £200 monetary risk.

10550-10450 = 100 pip risk.

200/100 = £2 per pip value (this is your position size for spread betting accounts).

From here we need to find out what our £2 pip value is in the quote currency of the pair.

In this case the quote currency is NZD.

Currently the exchange rate of GBPNZD is 1.8606. So £2 pip value x 1.8606 = 3.7212

Therefore if you’re not spread betting and need to know how many lots you need to buy, your position size would be 37 micro lot, 3.7 mini lots or 0.37 standard lots.

How to calculate your position size forex

This would equate to 37,000 units of currency. However most brokers will not allow you to buy a fraction of a lot, so you must have the most appropriate account type for you risk tolerance and account size.

A Final Word

Although this might sound complicated, once you have it figured out do it a few times the process will become simple.

Stock Risk Management: How To Calculate Your Position Size

Alternatively there are several position size and pip value calculators online for you to use. I personally use spread betting accounts and I have a function on my trade log that calculates my risk and position size, based on entry, stop loss, account size and risk.

Correct position sizing is an essential aspect of risk management and must be thoroughly understood and implemented into your own trading.

Thanks for reading!

Good trading…

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