Complex Cases of Position Size Calculation

How to Accurately Calculate Position Size in Forex: Complex Cases with and Without Leverage

In this lesson, we will explore how to correctly calculate position size when trading currency pairs, especially when your account currency does not match the traded pair’s currencies. We will also cover how to factor in leverage in these calculations.

Case 1: Your Account Currency Is Not in the Traded Pair but Is the Quote Currency in a Conversion Pair

Let’s say our Forex Ninja, Ned, has returned to the U.S. and wants to trade EUR/GBP. He plans to set a 200-pip stop-loss and risk 1% of his $5,000 deposit ($50).

Since the pip value is calculated in the quote currency (GBP), we first need to convert $50 into British pounds. Assuming the GBP/USD exchange rate = 1.7500, we calculate:

50×(11.7500)=28.57GBP50 \times \left(\frac{1}{1.7500}\right) = 28.57 GBP

Now, we determine the pip value:

28.57200=0.14GBP per pip\frac{28.57}{200} = 0.14 GBP \text{ per pip}

Then, we calculate the position size:

0.14×(10,000 units of EUR/GBP1 GBP per pip)≈1,429 units of EUR/GBP0.14 \times \left(\frac{10,000 \text{ units of } EUR/GBP}{1 \text{ GBP per pip}}\right) \approx 1,429 \text{ units of } EUR/GBP

Thus, Ned can sell 1,429 units of EUR/GBP while staying within his risk limits.

Adding Leverage

If the broker provides 1:100 leverage, only 1% of the position’s value is required as margin.

• Full position value: 1,429 EUR × EUR/GBP exchange rate
• Required margin (1:100 leverage): (1,429 × EUR/GBP) / 100

This allows trading a position 100 times larger than the deposit, but also significantly increases risk.

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Case 2: Account Currency Matches the Base Currency of the Traded Pair

Now, let’s say Ned is snowboarding in Switzerland and opens a trading account with a local broker. He wants to trade CHF/JPY, setting a 100-pip stop-loss and risking 1% of his CHF 5,000 account (CHF 50).

Since the account currency (CHF) matches the base currency of the pair, we can directly convert the risk amount into Japanese yen. Assuming the CHF/JPY exchange rate = 85.00, we calculate:

50×85=4,250JPY50 \times 85 = 4,250 JPY

Next, we determine the pip value:

4,250100=42.50JPY per pip\frac{4,250}{100} = 42.50 JPY \text{ per pip}

Then, we calculate the position size:

42.50×(100 units of CHF/JPY1 JPY per pip)=4,250 units of CHF/JPY42.50 \times \left(\frac{100 \text{ units of } CHF/JPY}{1 \text{ JPY per pip}}\right) = 4,250 \text{ units of } CHF/JPY

Adding Leverage

If the broker offers 1:50 leverage, the actual margin required would be:

• (4,250 × CHF/JPY) / 50

This means Ned needs 50 times less capital than the full position value, but the risk also scales accordingly.

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Key Takeaways

1. If your account currency does not match the traded pair, convert the risk amount into the quote currency before calculating position size.
2. If your account currency matches the base currency of the traded pair, you can directly convert the risk amount into pip value using the exchange rate.
3. Leverage reduces the margin required but significantly increases both profit potential and risk.

 

By following these rules, you can accurately size your trades and manage risk without exceeding your acceptable loss limits.