Assume you wish to buy EUR/GBP and your broker account is in USD.
You only want to risk $100 in this trade. But you’re not dealing in US dollars; you’re dealing in euros and pounds. How do you determine the size of your position?
In this session, we’ll show you how to calculate the size of your position while trading currency pairings that aren’t in your account denomination.
If your account denomination is not in the currency pair traded, but the same as the conversion pair’s counter currency..
Example: USD account trading EUR/GBP
Ned, whom we met in the previous class, has returned to the United States. Today, he intends to trade EUR/GBP with a stop loss of 200 pips.
To get the proper position size, we must first determine the value of Ned’s risk in British Pounds.
Remember that the value of a currency pair is expressed in the opposing currency.
Step 1: Determine risk amount in USD
Okay, let’s straighten things out here. He’s back trading with his U.S. broker selling EUR/GBP and he only wants to risk 1% of his USD 5,000 account, or USD 50.
To find the correct forex position size in this situation, we need the GBP/USD exchange rate.
Step 2: Convert USD risk amount to GBP
Let’s use 1.7500 and because his account is in USD, we need to invert that exchange rate to find the proper amount in British Pounds.
USD 50 * (GBP 1/USD 1.7500) = GBP 28.57
Now, we just finish the rest the same way as the other examples.
Step 3: Convert GBP risk amount to pips
Divide by the stop loss in pips:
(GBP 28.57)/(200 pips) = GBP 0.14 per pip
Step 4: Calculate for position size
And finally, multiply by the known unit-to-pip value ratio:
(GBP 0.14 per pip) * [(10k units of EUR/GBP)/(GBP 1 per pip)] = approximately 1,429 units of EUR/GBP
Ned can sell no more than 1,429 units of EUR/GBP to stay within his pre-determined risk levels.
If your account denomination is not in the currency pair traded, but the same as the conversion pair’s base currency...
Example: CHF account trading USD/JPY
Ned chooses to go snowboarding in Switzerland, and in between a couple of double black diamond runs, he establishes a trading account with a local FX broker on his super spy phone.
He sees a wonderful setup on USD/JPY and has chosen to exit the trade if it breaks through a big resistance level–about 100 pips against him.
Step 1: Determine risk amount in CHF
Ned will only risk the usual 1% of his CHF 5,000 account or CHF 50.
Step 2: Convert CHF risk amount to JPY
First, we need to find the value of CHF 50 in Japanese yen, and since the account is the same denomination as the conversion pair’s base currency, all we have to do is multiply the amount risked by CHF/JPY exchange rate (85.00):
CHF 50 * (JPY 85.00/ CHF 1) = JPY 4,250
Now, we just finish the rest the same way as the other examples.
Step 3: Convert JPY risk amount to pips
Divide by the stop loss in pips:
JPY 4,250/100 pips = JPY 42.50 per pip
Step 4: Calculate for position size
Finally, multiply the result by a known unit-to-pip value ratio:
JPY 42.50 per pip * [(100 USD/JPY units)/(JPY 1 per pip)] = roughly 4,250 USD/JPY Shabam! That’s all there is to it!
To keep his loss at CHF 50 or below, Ned can trade no more than 4,250 units of USD/JPY.
