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Is this calculation correct?

  • #1
  • First Post: Jun 2, 2010 3:03pm Jun 2, 2010 3:03pm
Hello everyone!

Hoping someone could verify that im getting this correctly, and if not could clarify whats wrong

If we deposit 10 000usd and we get 1:400 leverage, it basically means we can play with 4 000 000usd.

So in order to use correct money management we only want to risk 2% per trade, which is 200 or 80 000 leveraged.

80 000 = 8 mini lots

8 mini lots gets us a pip value of 8$.

We then take the 2% that we're actually risking and divide it with our pip value.

200$ / 8$ = 25pips.

So for our trades we should have a max stop loss at 25, is this correct?

We got 1250pips to trade with before we're busto (10 000 / 8 = 1250), or 50 trades. ( 1250 / 25 = 50 )

Thanks for all help in advance!
  • #2
  • Jun 3, 2010 12:28am Jun 3, 2010 12:28am
Quoting Storeball
Hello everyone!

Hoping someone could verify that im getting this correctly, and if not could clarify whats wrong

If we deposit 10 000usd and we get 1:400 leverage, it basically means we can play with 4 000 000usd.

So in order to use correct money management we only want to risk 2% per trade, which is 200 or 80 000 leveraged.

80 000 = 8 mini lots

8 mini lots gets us a pip value of 8$.

We then take the 2% that we're actually risking and divide it with our pip value.

200$ / 8$ = 25pips.

So for our trades we should...

Ignoring margin call your numbers are right but it's an unusual way to look at things!

Work it out a different way.....

Stops should be calculated and placed according to the market and your analysis, not how much you or your account can afford to lose before going bust! Say your analysis says that if the market moves 70 pips against you then your Eur/Usd trade is either wrong or no longer viable. Your account equity is $10k of which you are prepared to risk 2% on this trade. 2% of $10k as you rightly said is $200, and $200 divided by your 70 pips stop would mean a pip value of $2.86 give or take, therefore a trade size of 28,600 units. Job done!
  • #3
  • Jun 3, 2010 3:10am Jun 3, 2010 3:10am
Quoting pipmutt
Ignoring margin call your numbers are right but it's an unusual way to look at things!

Work it out a different way.....

Stops should be calculated and placed according to the market and your analysis, not how much you or your account can afford to lose before going bust! Say your analysis says that if the market moves 70 pips against you then your Eur/Usd trade is either wrong or no longer viable. Your account equity is $10k of which you are prepared to risk 2% on this trade. 2% of $10k as you rightly said is $200, and $200 divided by your...
Thanks alot Pipmutt!

My calculation I guess is not ideal, however it helps me understand the combination between pip value, leverage and stop size. So what this means is basically that using high leverage does not have to be bad, as long as your stops are set according to what you want to risk.

So the formular for calculating this is pretty easy then,

used margin / stop loss = pip value
pip value X 10 000 = lot size

200 / 70 = 2,86pip value
2,86 X 10 000 = 28 600 lot.

or in my example

200 / 25 = 8 pip value
8 X 10 000 = 80 000 lot.

This makes things really clear actually
Thanks a bunch!
  • #4
  • Jun 3, 2010 12:26pm Jun 3, 2010 12:26pm
Quoting Storeball

as long as your stops are set according to what you want to risk.
Well stops are set according to the market, you decide at what price (level) your trade is not working out and you want to cut your loss. Then work out 2% and divide it by the number of pips stop. That then gives you the value of each pip, and therefore trade size.

I think you've got it, you're just expressing it differently, try it on demo first.
  • #5
  • Jun 3, 2010 1:20pm Jun 3, 2010 1:20pm
Quoting pipmutt
Well stops are set according to the market, you decide at what price (level) your trade is not working out and you want to cut your loss. Then work out 2% and divide it by the number of pips stop. That then gives you the value of each pip, and therefore trade size.

I think you've got it, you're just expressing it differently, try it on demo first.
So basically we dont want a fixed sl, we put it where the market tells us and therefor it wont be a set number if im getting you correctly?

That does definately make sence, just helps knowing how to calculate it all properly, and it also make it easier to handle higher leverage.
  • #6
  • Jun 4, 2010 1:07am Jun 4, 2010 1:07am
Quoting Storeball
So basically we dont want a fixed sl, we put it where the market tells us and therefor it wont be a set number if im getting you correctly?
Correct! We put our stop loss at a price/level which, if reached, means our analysis was wrong so there's no point in being in the trade any longer. We may as well cut out losses and look for other opportunities rather than spend time, energy, and money on hoping the market turns around.
  • #7
  • Jun 4, 2010 1:23am Jun 4, 2010 1:23am
This has been real helpful pipmutt!

Now I hopefully can cross this out as done on the to do list of forex training
  • #8
  • Jun 5, 2010 2:30am Jun 5, 2010 2:30am
Quoting Storeball
This has been real helpful pipmutt!

Now I hopefully can cross this out as done on the to do list of forex training
What's next on the list? If they're all as easy as that one you'll be making money in no time!
  • #9
  • Jun 5, 2010 6:03am Jun 5, 2010 6:03am
Quoting pipmutt
What's next on the list? If they're all as easy as that one you'll be making money in no time!
That is true! Still im getting the feeling that the things that might seem complicated are, once you've gotten a grasp on it, actually pretty simple! Hopefully that feeling will continue throughout this never ending journey

So next for me is really further studying and getting a good grasp of price action trading and EOhater trade what you see system. Kenneth Lee in his thread is doing a great job there!

Hope your having a great weekend!
  • #10
  • Jun 5, 2010 8:23am Jun 5, 2010 8:23am
Quoting Storeball
Still im getting the feeling that the things that might seem complicated are, once you've gotten a grasp on it, actually pretty simple!
They are, incredibly simple! People unnecessarily complicate the whole process in my opinion, they seem to think the smarter and more complex they make it sound - the more successful they'll be. If anything the opposite is true.

Quoting Storeball
So next for me is really further studying and getting a good grasp of price action trading and EOhater trade what you see system. Kenneth Lee in his thread is doing a great job there!
Hmmm, can't really comment other than to say he seems to be using more MA's than suits my taste, but if it works for him then hey.......oh and that he knows a lot of jokes!

Quoting Storeball
Hope your having a great weekend!
Thanks, you too!
  • #11
  • Jun 10, 2010 6:52am Jun 10, 2010 6:52am
I've just been playing around with some numbers lately and it is amazing what can really be aquired once we get the hang of this.

Just some food for thought, if we continue with with the example where we deposit 10 000usd, use 400:1 leverage and trade 2% or 200$. As Pipmutt stated clearly we dont want to use a fixed sl, but lets say we wont go over 25pips so we can trade with 80 000, leaving us with 8$pr pip.

That will mean, if we get only +30pips aday we will at the end of the month have an increase of 50% on our account! Pretty neat!

30pips X 21days = 630 pips at end of month

630pips X 8 = 5040$

5040 / 10 000 = 0,504 = 50%

Now I know I havent accounted for spreads or anything, and I'm not saying its easy to get a 50% return each month, me personally im not even trading with real $. But there are guys out there making a hell of a lot more then 30pips aday, just look at EO who has an average of 1000 pips a week(!) and Kenneth Lee averaging at least 100pips aday. So all im saying is that i'v noticed there are quite a few people saying that a 5-10% return is pretty much all you should expect, but man if we really want to spend all the countless hours, days weeks and even months of our time to become great traders we should be expecting much more. It is as my previous manager told me, your aim should be to become a billionaire, because then at the very least you will become a millionaire.

Perhaps just ramblings from my side, but for me just playing around with numbers and thinking about whats possible really gets my juices flowing, as well as its fantastic fuel for my determination and motivation!
  • #12
  • Jun 10, 2010 9:51am Jun 10, 2010 9:51am
http://www.acclaimimages.com/_galler...0705-0209.html

Consistency and edge are such killjoys.
  • #13
  • Last Post: Jun 12, 2010 2:49am Jun 12, 2010 2:49am
Quoting Storeball
i'v noticed there are quite a few people saying that a 5-10% return is pretty much all you should expect
In some cases not much more than that.....annually!

It's true though, potentially there are obscene amounts of money to be made in the markets, fortunes are made.....and lost.

Hitting the big time is a great motivator, it's what keeps people going back to casinos and race tracks.

Get into a landing pattern and come back down to earth, the altitude is frying your brain
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