How to calculate position size with funded currency in mind
At times while trading, we may forget that our funded currency plays a part towards calculating our stop loss. Here’s a simple example.
- Trading capital: Funded SGD 10,000 into our trading account
- Equity at risk: Each position risks 2% of our capital (2% x 10,000 = 200). This is the amount of money we want to risk in every trade.
- Forex leverage: 1 is to 100
- Stop Loss for this trade is 50 pips
- Contract size: mini-contracts
We decide to do a BUY trade on EURUSD. Theoretically with an equity at risk of SGD 200 per trade and a stop loss of 50 pips per mini contract, we can do up to 4 minis.
Equity at risk ÷ Stop loss (200 ÷ 50) = Position size of 4 minis.
Change value of stop loss into funded currency and adjust position size accordingly
However, recall that our funded currency is in SGD while our trade is in EURUSD where pips will be valued in USD.
Many new traders run into this situation where they decide to risk SGD 200 of equity in each trade but find that 4 minis with 50 pip stop actually busts the SGD 200 value because the stop loss in valued in USD!
Therefore we need to convert that 50 pip stop loss in USD per mini in to SGD.
Assuming that USDSGD is 1.300, a 50 pip stop loss in USD translates into 50 x 1.3 = SGD 65.
With SGD 200 equity at risk per trade and a 50 pip stop loss in worth SGD 65, the maximum position size to trade is 200 ÷ 65 ~ 3 minis.
Last time, many things that I wanted were just dreams, now I see them as possibilities. I’m looking forward to own pent-house suite in Manhattan overlooking Central Park because forex trading with Tflow® makes it possible. Find me on Google+