Cache: A hiding place, especially one in the ground, for treasures
Forex calculations are not always straightforward, so this listing aims to clarify the basics of how these calculations are made. This should allow you to easily re-create these calculations in Excel or Spreadsheet for your own use
Position size is always calculated to match the Risk amount that you are willing to lose on this trade – the worst case scenario. In other words, the amount of currency units (lots) that you trade should it move against you to your Stop Loss point, it should only result in a loss equal to your Risk amount. This is why Position sizing is critical to money management as usually the Stop Loss point is determined based on a Technical level and can’t be freely moved around.
Position Size = ( Risk Amount x Exchange Rate[Account:Quote] ) / (Stop Loss Size x Contract Size)
Simply put, the maximum Position Size (PS) that you should take is the Risk Amount (RA) divided by the Stop Loss Size (SLS). Adjust the Risk Amount (RA) by the Exchange Rate (ER) of the Account Currency to the Quote currency and that’s it.
We’re going to use a standard Contract Size of 100,000 and the Stop Loss Size in delta as if you subtract Entry and Stop Loss to get the Position Size in Lots
|#||Account Currency||Pair||Quote Currency||Exchange Rate||Risk Amount (Account Currency)||Stop Loss Size||Calculation||Position Size||Notes|
|1||USD||EURUSD||USD||1||50 USD||0.0023||=(50 * 1) / (0.0023 * 100000)||0.22||Exchange Rate is 1 because USD:USD|
|2||USD||USDJPY||USD||120.00||50 USD||0.70||=(50 * 120) / (0.7 * 100000)||0.08||In JPY pairs 70 pips is 0.70|
|3||USD||USDJPY||USD||120.00||585 USD||0.70||=(585 * 120) / (0.7 * 100000)||1.00||70 pips in 1 lot is equal to a 585 USD move|
|4||GBP||GBPUSD||USD||1.5450||50 GBP||0.0091||=(50 * 1.545) / (0.0091 * 100000)||0.08||Actually 0.08489 but we're rounding down|
|5||GBP||GBPUSD||USD||1.5450||590 GBP||0.0091||=(590 * 1.545) / (0.0091 * 100000)||1.00|
Required Margin tells you how much margin is required to take a trade of a certain size. Margin is calculated based on the Base currency (the left side) and considering the size that you’re trading with the Account Leverage. The Base currency is also sometimes referred to as the Margin Currency. This will have to be exchanged to Account currency of course, if they’re different
Required Margin = ( (Trade Size x Contract Size) / Account Leverage ) * Exchange Rate [Base:Account]
The Required Margin is taking the currency units that you would like to trade (from Lot Size x Contract Size) and dividing it by the Account Leverage ratio that you have. This will be exchanged into your Account currency by multiplying it by the Exchange Rate of the Base Currency to your Account Currency.
|#||Account Currency||Leverage||Pair||Margin Currency||Exchange Rate||Trade Size||Calculation||Margin Required||Notes|
|1||GBP||1:20||GBPAUD||GBP||1||0.20||=(0.2 * 100000 * 1) / 20||1000 GBP|
|2||GBP||1:20||EURGBP||EUR||0.7330||0.22||=(0.22 * 100000 * 0.7330) / 20||806 GBP|
Scaling in and out of a position can have massive effects on your Forex positions. If used correctly, it may hugely enhance your entries and exit, whilst reducing your risk. However, it can also compound your losses as you scale into a losing position. The key here is to understand the impact of scaling in and out with a simple calculation to give you a single weighed price – the Effective Price – for your entry or exit.
To calculate the Effective Price for an entry/exit executed over multiple orders, we will weight the prices based on the Order Size divided by the Total Position Size. In other words, the Effective Price is the sum of size-weighed prices
Effective Price = OrderSize1/PositionSize x Price1 + OrderSize2/PositionSize x Price2 + . . . + OrderSizeN/PositionSize x Price N
Obviously, this formula can be applied to N number of prices where you executed N number of orders.
Applying this calculation to a GBPUSD position where we scaled-in and we scaled-out for a Position Size of 2.00 Lots (200,000 currency units)
|#||Order Size||Price||Weighed Price|
Effective Price for this entry becomes 1.54163. Note that the first order was at 1.5473, the second and third orders weighed it down by almost 57 pips
In Excel, you would implement this Spreadsheet with these formulas:
Cell C6 gives you the Effective Price