that you have an account with 10,000 US Dollar and you are ready to
lose 2% in a bad trade. You are considering a position on the USD/JPY
and the stop loss for that trade is set at a distance of 50 pips. The
current pip value per standard lot is, let's say, 9,85 US Dollars. You
are now ready to calculate your position's size by using the formula:
Position size = ((account value x risk per trade) / pips risked)/ pip value per standard lot
((10,000 US Dollars X 2%) / 50) / 9.85 = (200 USD / 50 pips) / 9,85 =
4 USD / 9,85 USD = 0.40 standard lots (4 mini lots or 40.000 currency units)
In case you are going to open several positions, the same equation would
be used to limit the overall risk in all the open positions. The only
difference is that a maximum number of open positions has to be set
beforehand and a partial risk attributed to each one of the positions. The pip value:
Let suppose your account is in USD:
If USD is quote currency of the currency pair. 1 standard Lot
(100,000 base units) that the quote currency is the USD such as EUR/USD.
The Pip Value is calculated:
100,000*0.0001 (4th decimal pip)=$10
If USD is base currency of the currency pair. 1 standard Lot
(100,000 base units) and the base currency is the USD such as USD/JPY.
The Pip Value is:
The USD/JPY is traded at 107.107 means that $1=107.10 JPY 100,000*0.01 (the 2nd decimal) /107.107=$9.33. pip value
This is approximated because the rate changes, so does the value of pip.
If the USD is not traded in the pair. 1 standard Lot (100,000 base units) on GBP/JPY.
If GBP/JPY is traded at 141.850.
The Pip Value => 100,000*0.01JPY*1GBP/141.850JPY = 7.05 GBP
Because the base currency of the account is the USD then we need to take
into account the GBP/USD rate which is currently at 1.32543.
7.05 GBP/(1 GBP/1.32543 USD)= $9.34 pip value
Hope it helps :)