Money Management Clarification

I'm attempting to understand the correct process for determining the position size against the 2% rule as all of the example seem to work backwards from the way you would actually calculate it.

Assuming that you have $100,000 in your account and are looking at a trade that has a stop loss based on technicals of 22. To work out the position size, you merely do this:

MaximumRiskedCapital=100000*0.02=$2000
TradeRiskPerLot=22(Stop) * $10(Pip) = $220
MaximumRiskedCapital/TradeRiskPerLot=9.09

So, 9 standard lots for a total position size of $900,000USD

I think I've read that this is only valid on pairs with a base of USD. Why is this so and how can I add this to my calculations? Lets say I wanted to calculate AUDNZD, how would that modify the calculations?

One last question. Since I have a $900,000 position but only 100,000 it means I have a 1:9 leverage ratio. My demo account however is still at the default 1:100. I guess 1:100 is a maximum limit and not something to calculate? Yes?

Many thanks,

Chris

Hi Chris,

You are correct in the way you are calculating your position size. Basically the formula I use in excel is:

TradeSize = (AccountBalance x %Risk)/($PerPip x (StopLossInPips + Spread))

Only pairs that have a USD base are worth $10 per pip per standard lot. For other crosses the value varies, because your account is USD based(ie your account is in USD). To find out what the $ per pip per standard lot is on non-USD based pairs your broker will have a $per pip calculator or spreadsheet somewhere in their platform (I'm with oanda and they have a tool called Pip Profit Calculator which gives this value for the different crosses).

You are also correct in your 1:9 leverage calculation ... this is your true leverage on this trade. If you are only trading 1-2% of your account, using hard stops and not having too many open trades at any one time the high leveage available on your account is usually never reached. So you are correct in your thinking that the leveage offered by your broker is not something you need to calculate but represents the maximum leverage available to you.

If you placed a 1 full lot trade ($100K) and only had an account size of $1Kthen you would be fully utilising the 1:100 leveage ... and would most likely lose your $1K pretty quick .

Hope this helps...

br,

zinc6

Once the value of a pip has been determined the rest can be determined..
Google "forex pip value" found this amongst others.
http://forexfever.blogspot.com/2006/...lculation.html