Position size calculations, pip values, please help me understand

I've been trying to size my positions based on a 1% risk on my account using this online tool: http://www.earnforex.com/position-size-calculator

However, my account currency is GBP, and it doesn't seem to work (not sure if it's because it doesn't work for GBP accounts, or some fundamental misunderstanding on my part). It always produces a lot size where my risk is less than 1%, sometimes significantly so.

I've been unable to find a better one online (better than doesn't work, heh...), so I decided to write something myself that works, partly because this will improve my understanding in the process.

However, something's going wrong because my calculations violate the idea that you have fixed pip values for GBP/USD with a USD account.

Here's my thinking with a simple example, if someone could tell me where I'm going wrong, that would be great:

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Currency GBP/USD
Buy: 1.5000
Stop 1.4900 (100 pips risk)
Account size $5000
Risk 1% ($50)

When you go long, you’re buying GBP at 1 / 1.5000 = 0.66666667
When the stop is hit, you’re selling GBP at 1.49

So, 1 lot at 0.66666667 is £66,666.66
Sell this at 1.49 = $99,333.33
Loss = $666.67

So for a risk of 1%, you need to buy 50/666.67 = 0.075 lots

Change the current exchange rate to 2.0000, and you end up with 0.1 lots

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Any pip value calculator will tell you that 1 pip in GBP/USD is worth $10 for a standard lot, yet I can't seem to get my thick head around my simple calculations produces a variable pip value...

I can see that if you multiply the resulting lots by 1/exch rate, you get the correct value for a $10 pip, but I don't see why this should be the case:

1) you have $
2) you exchange $ for £ at 1/(GBP/USD rate)
3) you exchange £ for $ at GBP/USD rate, so you now have $

Somebody please help my poor head.

Say GPBUSD = 1.5000 (exchange rate).

It's your exchange thinking which is wrong. When you go long in GBPUSD you buy GBP and sell USD @ 1.5000, not 1/1.5000. Likewise, when you short GBPUSD you sell GBP and buy USD @ 1/1.5000.

Pip Value = (Pip Nominal Value / Exchange Rate) * (Lot Size * 100 000)

Pip Nominal Value = 0.0001. Standard lot gives Lot Size = 1. (1 standard lot)

Pip Value = 0.0001 / 1.5000 * ( 1 * 100 000) = 0.6667 GBP. But you want it in USD so you will have to multiply with the exchange rate back to your currency = 1.5. Then you get Pip Value = USD 10, which is what you have for a standard lot in a XXXUSD currency pair.

Remember that: Stop Loss * Pip Value = Amount Risked

With a USD 5 000 account and 1 % risk, amount risked is USD 50. With a stop loss of 100 pips, you need a pip value that satisfies: 100 * Pip Value = USD 50, i.e. Pip Value = USD 0.5. Since the base currency in GBPUSD is USD, you know that a standard lot position yields a pip value of 1 USD. Thus, you should size your position to be half a mini lot such that it does not exceed USD 0.5 in pip value.

Thanks for your reply.

I thought a standard lot was 100,000 units of the base currency, and a mini 10,000?

Well I did wonder about this, but if my rate is 1.5000 when I'm buying GBP, I'd end up with £150,000 from $100,000 which clearly isn't right.

I'm close to understanding what's going on here, but just not quite there...

If I use your pip value calculations (though assuming a lot is 100,000 units) for 100 pips, I get:


Whereas with my calculations I got:


So I calculated the same value, but in $ rather than £.

I must be missing a conversion somewhere, but I don't see where or why?

My mistake. I will edit my posts so I do not confuse other people seeking for answer.


When you go long with 100 000 units (one standard lot) in GBPUSD you do not buy 66667 GBP for 100 000 USD. You buy 100 000 GBP for 150 000 USD.
When GBPUSD = 1.4900 you sell the lot for USD 150 000 * (1.4900/1.5000) = 149 000 USD. The loss is 1 000 USD which is equal to 100 pips of USD 10 each.

Perfect!

Now I just have to deal with different currencies, but that should be easy. Thanks.