Leverage and position sizing

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Hi

I'm trying to work out my lot sizes from account percentage. 

For example. 
(Profit in dollars÷s/l pips)÷10 dollars per pip.

For example 25 pip stop loss with $20 risk. 

(25÷20)÷10= 0.08 lots.

So plugging in my numbers gives me a lot size of 0.08 with this math. What I then don't understand is how leverage affects this. Do I just multiply my calculated lot size by the leverage now?

So 0.08 X my leverage of 30 = 2.4 lots?

Thanks in advance for any help given


 
toma4186: I'm trying to work out my lot sizes from account percentage. For example. (Profit in dollars÷s/l pips)÷10 dollars per pip. For example 25 pip stop loss with $20 risk. (25÷20)÷10= 0.08 lots. So plugging in my numbers gives me a lot size of 0.08 with this math. What I then don't understand is how leverage affects this. Do I just multiply my calculated lot size by the leverage now? So 0.08 X my leverage of 30 = 2.4 lots? Thanks in advance for any help given

Leverage is irrelevant when calculation your risk based on Stop-Loss, Tick-size and Tick-Value. It is not part of the equation!

Free margin (aka Leverage) needs to be checked to prevent Margin Call or Stop-out, but not for the risk calculation based on stop-loss!

 

Forum on trading, automated trading systems and testing trading strategies

Money management MQL4

William Roeder, 2021.07.31 21:59

Risk depends on your initial stop loss, lot size, and the value of the symbol. It does not depend on margin and leverage. No SL means you have infinite risk. Never risk more than a small percentage of your trading funds, certainly less than 2% per trade, 6% total.

  1. You place the stop where it needs to be — where the reason for the trade is no longer valid. E.g. trading a support bounce the stop goes below the support.

  2. AccountBalance * percent/100 = RISK = OrderLots * (|OrderOpenPrice - OrderStopLoss| * DeltaPerLot + CommissionPerLot) (Note OOP-OSL includes the spread, and DeltaPerLot is usually around $10/pip but it takes account of the exchange rates of the pair vs. your account currency.)

  3. Do NOT use TickValue by itself - DeltaPerLot and verify that MODE_TICKVALUE is returning a value in your deposit currency, as promised by the documentation, or whether it is returning a value in the instrument's base currency.
              MODE_TICKVALUE is not reliable on non-fx instruments with many brokers - MQL4 programming forum 2017.10.10
              Is there an universal solution for Tick value? - Currency Pairs - General - MQL5 programming forum 2018.02.11
              Lot value calculation off by a factor of 100 - MQL5 programming forum 2019.07.19

  4. You must normalize lots properly and check against min and max.

  5. You must also check FreeMargin to avoid stop out

Most pairs are worth about $10 per PIP. A $5 risk with a (very small) 5 PIP SL is $5/$10/5 or 0.1 Lots maximum.


 
Thanks for your reply. What I was thinking is if I have 30:1 leverage with an account balance of 1000 then I would calculate my risk based on a 30000 total account balance. 

What I now see is that I only have 1000 to lose. If I used the 30000 figure it would take me well over the acceptable risk percentage.

Thanks again for clarifying this

 
You are welcome.
 
Many argue that leverage is not important, I tend to disagree.

The equation for risk based on the amount risked percentage of the equity or balance, lacks something which is quite slippery to get but one of the ways to grasp it is based on leverage.

When for instance we have a 1K $ account and we risk 2% which is 20 $ we can do it in many ways. (I will use extreme examples to illustrate the point)
One way for instance is to risk 200 pips of 0.01 volume on USD. This means we opened a 0.01 lot which is a leverage of 1. 
Another way is to open a 5 lot position, and risking 0.4 pips. This means  we opened 5 Standard lot which is leverage of 500. 

Both comply with the risk formula as both risk only 2 percent of balacne but:
The second one is much more risky as it will tend to lose almost always, and one way to avoid those risks is to use leverage restriction.
 
Amir Yacoby: Many argue that leverage is not important, I tend to disagree. The equation for risk based on the amount risked percentage of the equity or balance, lacks something which is quite slippery to get but one of the ways to grasp it is based on leverage. When for instance we have a 1K $ account and we risk 2% which is 20 $ we can do it in many ways. (I will use extreme examples to illustrate the point). One way for instance is to risk 200 pips of 0.01 volume on USD. This means we opened a 0.01 lot which is a leverage of 1. Another way is to open a 5 lot position, and risking 0.4 pips. This means  we opened 5 Standard lot which is leverage of 500. Both comply with the risk formula as both risk only 2 percent of balacne but: The second one is much more risky as it will tend to lose almost always, and one way to avoid those risks is to use leverage restriction.
You misunderstand. I did not state that leverage is unimportant. What I stated was that it is not part of the equation used to calculate the risk based on the Stop-Loss. The risk posed by leverage is calculated in a completely different way and separately from the Stop-Loss risk. Both types of risk need to be analysed and considered, but their calculations should not mixed up with one another.
 
Fernando Carreiro:
You misunderstand. I did not state that leverage is unimportant. What I stated was that it is not part of the equation used to calculate the risk based on the Stop-Loss. The risk posed by leverage is calculated in a completely different way and separately from the Stop-Loss risk. Both types of risk need to be analysed and considered, but their calculations should not mixed up with one another.
Of course, I did not say they should be combined in the same formula either. Just there is a claim that it can totally be disregarded, thats all. To me its a consideration.
 
Amir Yacoby: Of course, I did not say they should be combined in the same formula either. Just there is a claim that it can totally be disregarded, thats all. To me its a consideration.

It depends on situation. Many times, it can be totally disregarded. If the total maximum number of orders placed by all EAs, and their respective total stop-loss risk percentage for the batch, has been properly predefined and limited for the portfolio on the account, then margin considerations will not be required.

It is just when you have run-away cases or improperly defined portfolio risk, or ad hoc trading, that margin considerations need to be taken more seriously.

It is a lack of understanding and experience by traders, that usually leads them to risky situations in regards to margin and leverage.

 
As Fernando has stated, while leverage is important it is only important in terms of understanding how much margin is required to take your trade, If you have a fixed SL and known risk % being taken then more often than not, for this particular exercise, leverage doesn't matter. The only time it might matter is if based on those parameters you are trying to use a lot size that your captial can't cope with given you leverage (margin requirements to take the trade).
 
Ok, I tend to disagree with that. I think it should not be disregarded, or better said, its better to consider that too, and not just for margin. But forex is democratic land.
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