Thanks for the warm wishes, I think my previous response should clear things up.

Hi Shawn!

Appreciate the kind words about me and my blog.

Good question. Let me start by saying that things could be different between brokers (like value per pip, max leverage, etc.), so check the specifics with your broker first.

Leverage (in forex) primarily refers to the ability to use a certain amount of cash (or margin) to borrow a larger amount of money. So if your leverage is 400:1, then you are putting up $1 to control $400 worth of currency. The margin that you are putting up is held by the broker for the duration of the trade and cannot be used to take any other positions. It is returned when you close the trade.

Think of it like buying a house. You put down $20,000 in cash, but control an asset that is worth $100,000 (5:1 leverage). So now you are subject to the fluctuations of the $100,000 asset, instead of only what could happen with your $20,000.

Here is my suggestion…do not worry too much about the leverage when it comes to position size. If you understand that you are only risking 1% or less per trade, then that is the key. Leverage only comes really into play when you are trading several positions. You need to have enough margin in your account to take all those trades.

People get into trouble with higher margin because they say, “Oooo, I still have $1,900 in available margin, what else can I trade?” Or they risk like 75% of their account per trade, just because they can. If you stick to your trading plan and only risk 1% or less, then even if your system sucks, you will lose money much slower than people who are trying to hit homeruns with high leverage.

One time when it may come into play more is if you are trading a currency pair that has a high interest rate differential (like AUDJPY). Higher leverage means that you are borrowing more money per $1 in your account and that means you will pay (or make) more interest.

So just do as you have been doing, calculating the number of lots/units, given the price per pip and the $ amount of your max 1% loss per trade.

Hope that simplified it.

Cheers,
Hugh

Here is what relates to my question above (I read it on another website):

“In forex, the calculation of risk is first determined by the leverage, and then by the stoploss. Suppose we use a broker with a leverage of 1:100, and our stoploss is 100 pips. So if we have $10000, we should open a trade with 0.2 lots. If we win a little bit, we try 0.21. If we lose a little, we try 0.19. The lotsize is always 2% of our account free margin. In this way, we always keep a balance between risk and growth.”

Now you see at the end, he says: “The lotsize is always 2% of our account free margin”. I think that’s what is confusing me. Can you please explain that by a little example so that out position size (lot size) is 2% of our account margin or usable margin (whatever it is)?

That would be so kind of you.

Thanks for your kind help Hugh.

May God give you the desire of your heart and succeed all your plans.

Happy Trading ! 😉

Thanks for the great website and free resources. First things first, you have awesome communication skills and voice to suit that as well. Very plain and simple way to explain things. 🙂 Here is my question for you:

I am a bit confused regarding using these calculators. If I have $2,000 account size, my risk% per trade is 1%, and my stop-loss is 30 pips, this boils down to 6,667 units (lets assume EUR/USD at 1.3000). This part I understand very clearly.

Now if I have leverage of 400, how the leverage will come into play ? Because if my leverage is 400 and my account size is 2000, then I can buy 800,000 worth of a pair (depending on the price). I am confused because I think its kind of circular cell reference thing.

Another way of saying this is, for example, given the above calculations, if I am buying 6667 units and hit my stop loss, I will only lose $20. But now lets say we want our leverage and margin to determine the position size and then stop loss (lets say we want to buy 10000 units and 30 pips stop loss). How would we do that?
Can you please explain that?

Looking forward to hearing from you.

Thanks again.

🙂

Hi Andrew,

Sorry, I don’t know of anything at the moment. The cost per pip can vary between brokers, so you would really need to get something that is broker specific. If I find anything, I’ll let you know.

Hugh

For those not using Oanda, can you recommend a calculator that’s similar but available online?

You have to look around and try different things. I would recommend Chris Lori, Hector Trader, Rob Booker and Rudy Leder. They are all a good place to start your education.

The best way to trade is to find a strategy that suits your personality. You need to do a lot of testing and practice. It is NOT a get rich deal or magical formula that will make you successful. Check out my pro trader interviews to learn about people who make money trading.

Good Luck!

Thanks! Good luck to you too! How is it going for you?