How to calculate forex position sizing / lot sizing

Hi all.. most articles on position sizing / lot sizing do NOT explain how to factor risk in YOUR LOCAL CURRENCY terms. This is crucial if you want to have a grip on your money management. I've thought it through & will attempt a step-by-step guide on position sizing / lot sizing. Experts, please correct me where I'm wrong.

As a "newbie" to FX, all the articles I've read gave me the feeling that the explanations got from a-y BUT stop short of z. The z being how to consider risk in your LOCAL currency terms. Many articles advocate using a max of 2% of your capital so that you can last longer in your trading journey. This is a good thing. But what is not clear is how to size it in your LOCAL currency terms. Some articles will then provide links to position size calculators. But hey, isn't it important to know exactly how to calculate risk since it is MY $ @ risk.. or would you prefer to skip the thinking & depend on some online black-box calculator??


1) Account size (in your LOCAL currency) = S$10,000 (S$)... the local currency in this eg. is SGD

2) Risk per trade = 2% of capital
in your LOCAL currency terms = 0.02 x S$10,000 = S$200 per trade

3) Convert risk per trade from your LOCAL currency terms to the currency you are TRADING
eg. if trading EUR/USD, convert to the currency in the direct quote, the USD.

EUR/USD = 1.2500 => means EUR1 = USD1.25
the currency NOT quoted in the base of $1 is the currency you want to convert to.. in this example.. USD

S$1.2346 = USD1
Risk per trade in USD terms = S$200 / 1.2346 = US$162

4) Determine the number of pips to your stop loss from your entry price
eg. buy EUR/USD @ 1.2500
stop loss @ 1.2475
pips to SL = 1.2500 - 1.2475 = 0.0025 OR 25 pips

5) USD risk per pip = USD162 / 25 pips to SL = USD6.48

6) Figure out the smallest tick value for the currency you are trading.
eg. EUR/USD is quoted to 4 decimal places.. therefore the smallest tick value (aka 1 pip) is 0.0001
eg. USD/JPY is quoted to 2 decimal places.. therefore the smallest tick value (aka 1 pip) is 0.01

for EUR/USD, if it moves 1 pip, for a...
STANDARD lot, your account will move by = 0.0001 x 100,000 = USD10
....................................................MINI lot = 0.0001 x 10,000 = USD1
.................................................MICRO lot = 0.0001 x 1,000 = USD0.10
....................................................NANO lot = 0.0001 x 100 = USD0.01

7) Since I want to risk USD6.48 per pip, aka for each pip movement against me, I will lose USD6.48
If I buy 1 standard lot & EUR/USD moves 1 pip against me, I will lose USD10.
If I buy 0.648 STANDARD lots, for 1 pip against me, I will lose USD6.48
OR I can buy 6.48 MINI lots, for 1 pip against me, I will lose USD6.48
OR I can buy 64.8 MICRO lots, for 1 pip against me, I will lose USD6.48
OR I can buy 648 NANO lots, for 1 pip against me, I will lose USD6.48

Whether to trade STANDARD, MINI, MICRO or NANO depends on your account type.
Is it a pure MICRO lots ONLY account? If yes, trade 64.8 MICRO lots.
Is it a flexible account (can trade STANDARD, MINI, MICRO or NANO).. then you can trade either one. Just be sure to key in the correct units.



Cheers,
eb


Edited: correct spelling typos

Excellent post! I've always struggled to get my head round this. I agree that most explanations seem to skip this vital info. Ive taken a screenshot of your post and will be playing around with some numbers later. Thanks again!

Maybe I'm missing something here, but I don't see the point of this. For instance, my local currency is NZD. My trading account may be in USD. So whatever the account balance is, 2% of that is what I'm prepared to risk. There is no need to make any complex and time consuming conversions to my LOCAL CURRENCY. I am prepared to risk 2% of the account, irrespective of what currency the account is based in.

Agree!

When he says local currency he is referring to his account currency. Read the example.

Realjumper,

As TheMAXX said, 'Local Currency' refers to your account base currency (USD in your example).

You're absolutely right that if you wish to risk 2% of your account it does not matter which currency your account is in... 2% is 2%.

However, If you're trading Yen for example, how do you know what quantity to buy or sell? The conversion in step 3 is necessary in order to align your account currency with whichever currency you are trading at the time. As econbizer said, most tutorials on this aspect of risk management skip over this section.

To the OP,

To be certain of risking exactly 2% of your account, the position size will have to be changed with each pip change.

This is really not realistic, so can only get close to 2%, sometimes it will end up being more and sometimes less.

Going with the example you provided of Account size = SGD 10,000 and risk on a trade = 2% = SGD 200
S$1.2346 = USD1
Risk per trade in USD terms = S$200 / 1.2346 = US$162

So lets say you buy 25,000 of EUR/USD at 1.25 with a 65 pip stop and lets say you get stopped out at at 1.2435 for a .0065 X 25,000 = $162.5 loss in USD(lets just round it to $162 for simplicity sake)

As long as 1USD is still = SGD 1.2346 you are ok(2% loss), but if in the meantime USD has gotten stronger against SGD then you lose more than 2% in local currency.

Lets say in the meantime 1USD = SGD 1.2386. In that case $162 loss becomes SGD 200.6532 which is more than 2% in your local currency

If on the other hand SGD becomes stronger. If 1USD = 1.2306 then the $162 loss is only SGD 199.3572 which is less than 2%.

Interesting point you make here!

How bigger price swing would you need to see for any significant change in risk? I think this would only really be a problem if you were trading over very long time periods. I don't see that intraday and weekly trading would be affected to much by this fluctutation...

Thank you for your pointers!

Ruskie, thanks for highlighting the fluctuations in the local currency (base account currency) vs the traded currency, resulting in us not being able to keep to an exact 2% risk. I still recommend calculating the 2% risk per trade in your local currency aka base account currency. This will ensure that we lose a roughly equal $ amt on each stopped out trade. I used to skip the conversion to my base acct currency step and initially wondered why I lost different amounts each time I was stopped on diff trades, although my % risk was fixed at 2%.

Ballistical raised an important point that this is a risk that traders with long time frames need to consider. This is something I will definitely start considering if I get the chance to swing partial positions over longer trends.

This has been more than a useful post but i have a few more questions if i may. For most pairs when we calculate the conversion & in this case for the local currency, the SGD to trade the EUR/GBP, we would get the rate for GBP/SGD to do the conversion. In the case of EUR/USD, we would get the rate for USD/SGD. HOWEVER, in the pairs of yen and some others, we would be getting the SGD/JPY and not the JPY/SGD. How do we determine that?

Hi, try your lot sizing on excel or work it out on paper.
That way you can easily invert SGD/JPY to JPY/SGD.

Just follow the steps in post #1

Hi,

I've created an EA for position sizing which I would like to share with everyone. Since I am a new member, I could not create a thread for it , so I figured here would be a good place to add it.

The EA takes 2 inputs for calculation:

1. Percent risk based on account balance
2. Desired stop loss in pips

It also has various other inputs for aesthetic purposes.

The EA outputs a text object on your chart which reports the inputs, symbol it applies to, and the lot size appropriate for the specified sl pips and account risk.

I have based the calculation on the lesson in complex position sizing from babypips (http://www.babypips.com/school/under...on-sizing.html). The concept here is to calculate the risk you are taking in terms of your base currency,

The EA has been tested using Oanda with account currency in CAD, so if you are using a different account currency or broker, verify the results with the calculator on babypips (http://www.babypips.com/tools/forex-...sitionsize.php). It has not been tested in live trading either.

The EA updates on a tick basis, while this provides up-to-date calculation, it also may be computationally demanding. Additionally, in order to convert risk into the account currency, it uses the last 1 minute close as the exchange rate from a pair containing the account currency.

A few ideas I have for further development are:

1. Use keypress events to update the EA since there may not be need for tick based updates
2. Convert the EA into an Indicator
3. Figure out if account currency conversion can be done with tick data

If there are any advancements on these fronts, I will post an up-to-date version.

In continuation from my original post found here:

I've noticed a small error regarding the calculation of lot sizing. The lot sizing in the original version of the EA (v1.00) is reported in "Micro Lots" rather than "Standard Lots". This is easily corrected by dividing the lot sizing by 10, or changing the wording of the EA.

I've uploaded a new version of the EA (v1.01) to reflect dividing the reported lot sizing by 10, so that the EA reports the lot sizing correctly.

Thank you very much for your contribution, basically in my live trading account I am working with a fixed trading lot size according to my previous trading plan and strategy! I am sure, fixed trading lot size is very useful for being a self-discipline Forex trader! Like, now I don’t face any unexpected result in my live trading account, on the other hand, I upgrade my trading lot size in every 6 months according to my live trading performance!

Glad you've figured out a good MM strategy that works well for your trading faisal13!

I've updated the EA again, since I've made some changes and figured there may be others who are interested in it. This version is more visually appealing, as it places the information on multiple lines (see screenshot), and has scaling based on your desired font size, providing the chart scaling does not change.



Functionally, there was a small ambiguity in the risk dollar amount reported in v1.00 and v1.01. In these prior versions, the reported dollar risk amount was based on the input of the desired percent of your account to be risked. This is not quite reflective of the actual amount of money risked by the stop loss in your trade since the stop loss is calculated in pips. Since each pip has an incremental amount of dollar value associated with it, the amount of pips in your stop loss may not be exactly equivalent to your desired percentage of account risk (e.g. if you wanted to risk 5% of your account with a 20 pip stop loss, since you can't have a non-integer amount of pips, you may not be able to risk exactly 5% of your account value using this MM technique). Additionally since you are limited to 0.01 lot sizing, the combination of 100th of a lot incremental sizing and integer pip sizing lead to the formation of this discrepancy.

Because of this ambiguity, I've updated the EA (v1.10) to report the pip risk dollar amount for a given trade.

Hi, thank you for your contribution, the only thing is that I have a micro account and when I apply the EA it does not calculate the lot size or $ value

Hi,

I believed there is a control of lot size for any particular broker.

Print("Maximum permitted amount of a lot=",MarketInfo(Symbol(),MODE_MAXLOT));

May I know how to overcome this code so that the order lot size is not restricted by a particular broker?

Thanks.

this indicator doesn't work?