Calculating Position Sizes

To make things easier to understand, let’s walk through an example with Newbie Ned.

The Importance of Position Sizing

A long time ago, when Ned was still a newbie, he blew out his account by taking on huge positions. It was like he was a cowboy from the Midwest, trading from the hip with massive trades. He didn’t fully grasp the importance of position sizing, and his account paid the price.

Determined to never make that mistake again, Ned re-enrolled in the School of Pipsology to fully understand position sizing, ensuring what happened to him never happens to you!

In the following examples, we’ll show you how to calculate your position size based on your account size and risk comfort level. Your position size also depends on whether your account denomination matches the base or quote currency.

Case 1: Account Denomination is the Same as the Counter Currency

Let’s say Ned deposits USD 5,000 into his trading account and is ready to start again. He now uses a swing trading system that trades EUR/USD, and he’s risking about 200 pips per trade.

Since he doesn’t want to risk more than 1% of his account per trade, let’s figure out the position size that keeps him within his risk comfort zone.

Calculate the dollar amount risked:

5

,

000

USD

×

1

%

=

50

USD

5,000USD×1%=50USD

Find the value per pip:

50

USD

200

pips

=

0.25

USD per pip

200pips

50USD

=0.25USD per pip

Multiply by the unit/pip value ratio for EUR/USD (for one mini lot, each pip is worth USD 1):

0.25

USD per pip

×

(

10

,

000

units of EUR/USD

1

USD per pip

)

=

2

,

500

units of EUR/USD

0.25USD per pip×(

1USD per pip

10,000units of EUR/USD

)=2,500units of EUR/USD

So, Ned should trade 2,500 units of EUR/USD or less to stay within his risk comfort level. Otherwise, he’d be falling back into his old risky habits.

Case 2: Account Denomination is the Same as the Base Currency

Now, let’s say Ned is in the Eurozone, deposits EUR 5,000 into his account, and continues to trade EUR/USD with the same 200 pip stop. What would his position size be if he only risked 1% of his account?

Calculate the amount risked:

5

,

000

EUR

×

1

%

=

50

EUR

5,000EUR×1%=50EUR

Convert the risk to USD using the current exchange rate (let’s assume EUR/USD = 1.5000):

1.5000

USD

1.0000

EUR

×

50

EUR

=

75

USD

1.0000EUR

1.5000USD

×50EUR=75USD

Find the value per pip:

75

USD

200

pips

=

0.375

USD per pip

200pips

75USD

=0.375USD per pip

Multiply by the unit-to-pip value ratio:

0.375

USD per pip

×

(

10

,

000

units of EUR/USD

1

USD per pip

)

=

3

,

750

units of EUR/USD

0.375USD per pip×(

1USD per pip

10,000units of EUR/USD

)=3,750units of EUR/USD

So, to risk EUR 50 or less on a 200 pip stop on EUR/USD, Ned’s position size should be no larger than 3,750 units.

Conclusion

It’s still pretty simple, right? But what if there are more complexities? Don’t worry, we’ve got your back and will explain everything step-by-step, making it as easy as baking a cake!

Calculating Position Sizes

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