What is Position Sizing in Forex and Money Management Strategy | Baraq Adnan | Skillshare

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What is Position Sizing in Forex and Money Management Strategy

teacher avatar Baraq Adnan, Student and Entrepreneur

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Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

11 Lessons (29m)
    • 1. Course Introduction

    • 2. What is pip move in Forex

    • 3. How FXCM quotes prices for JPY and non-JPY pairs

    • 4. Different Account Types and Denominations

    • 5. How to calculate pip value with GBP account

    • 6. When to multiply or divide Exchange rate for conversion

    • 7. How to calculate Risk Per Trade

    • 8. How to Calculate Stop Loss Pips

    • 9. Position size formula to calculate Lotsize

    • 10. Practice Example Trade with position sizing and trade management

    • 11. Money management strategy and compounding

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About This Class

Course About

This course is about finding position size in Forex and  money management and how different aspects of financial markets help to control the risk. 

Background in Trading

You must have general understanding of trading or executing orders.  

Material Included

I'll cover theory with hands on practice approach and will also provide additional document that will help you to automate calculations. We will also cover Live charts analysis for examples. 

Meet Your Teacher

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Baraq Adnan

Student and Entrepreneur


A Student, Professional Trader and Entrepreneur.

Expertise in recognizing market structure and identification of price patterns for potential reversal point. An active trader and live forecaster at various recognize trading forums.

Carrying a mission to make it easier for people to have financial freedom by sharing passive income strategies that generate residual income with an entrepreneurial mindset.

Learn Together - Grow Together - Succeed Together

See full profile

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1. Course Introduction: Well, hi there. Thanks for tuning in. Today. We are going to cover well off the most important topic in forex industry, and that is position sizing. You know how we adjust our lot size on what are the key money management rules that can help us to be on the vetting side off the game. In this short course, which is compact with a lot off information we're going to cover what is paper? How we calculate the paper value on what is risk and stop loss, how we determine the stop loss when we are entering in any trade and how we can calculate the lot size or the position size position sizing with the proper money management will help us to be on the right side off this game on. Finally, we will also look into how compounding and help us to maximize our gains. So, without further to do, let's start this course, and one thing I will urge you throughout the course is in each presentation. Please conduct your own analysis and share your findings. So let's jump into this 2. What is pip move in Forex: Oh, you're welcome back now. In first slide, we are going to cover What is paper? How are we going to find Pip? You know, we heard a lot in forex industry that, you know, 16 perhaps 20 pips. 30 perhaps. Okay, what exactly? The paper? The paper, by definition, is a smallest fractional movement. Off price from one point to another. Okay, so let's take an example off us. Djp wipe here. Okay, Um, resuming the current exchange rate is $106.899 And if the price move from this point to one or 6.900 it's a difference between these two. Prices would be 20.1 and that is a one decimal point move, which is equal toe one pip. So if the pair moves, certain decimal points in in certain directions, you know each decimal point will called one pip on bear in mind. These decimal points differ from broker to broker. Well, let's explore this concept further. 3. How FXCM quotes prices for JPY and non-JPY pairs: Okay, now let's take an example Off affects CM broker. The broker I'm using at Woman Day courts to decimal point for GP wipers on four decimal point for known J P y pairs. Okay, let me explain this. What does it mean? Any pair in which JP wise appearing, they will quote the price in two decimal points. Andi, any bear in which JP wise not appearing, for example, you're a USD, GBP, USD, all the USDA and so on. So far, they will provide these prices in four decimal points. Okay, so here's an example. Where in a U S. D. J p y pair the current price one of $6.899 the price move to 900. So the difference between that price is one pip Move on. Similarly, if the price goes, you know 10 points towards upward, that is a 10 page move. So let's explore this further. In this example, we are going to see that us to get you a pair. The current price, one of four daughters, 08 on the price move one point up and that'll give us one pick up on any known G p y pairs . For example. Your USD, gbp, USD The cat GP Why shouldn't be in the slide? So it's it's a type of mistake. Euro GpB also God, except these are known J p y pairs and they called four decimal points as a price. So here's example. Off EUR USD, the current price is 1.1234 on the price move five points towards up and that gives us five pips. So now we understand how we can calculate the Pepes soap. It's basically a fractional change in price from the current price. Do a past price. The difference between that we can come up with the Pips. Wipes are necessary. Okay, so these helps us to calculate our risk. OK, so let's build our case. Let's move on to the next life 4. Different Account Types and Denominations: Welcome back now, Since we know what is Pape or Pip move. In order to calculate the paper value, we must first determine what sort off account we are trading. Okay, when we open an account, we opened that account into different types. It's either Xa standard account. It's a mini account. It's micro counters and Nana accounts. These accounts types differ from brokers to pro. There are certain managed accounts as well, but those are out of the scope of this conversation. What are these accounts type. So when we open a standard account, any trade or the lot we will place behind the scene, the broker will execute 100,000 units against one lot. Let's see if we have a standard account off $10,000 replace one lot trade. So the broker will place 100,000 years on our behalf, which will be equal to one lot on the pip value for the one lot in standard account would be $10. Okay, So, for example, if we place a trade in a standard account for one lot on the paper, move from one point to the second point. So like just one pip move then the value off that one pip move will be $10. So if the pip move five points in certain direction, then the value off those five pips will be $50. Okay, and that's we're talking about is gendered account. So in a standard account, the broker trade 100,000 units in many account, the large size unit will be 10,000 each paparelli would be $1. And in a micro account, each pip value will be 10 cents because the Lord size will be 1000 unit based on the account type we have. So we're reserving that our account types, you know, either in these categories. And then we also need to know about the denomination off our accounts. Our account denomination. It's other USD or all the dollar or a GP or DePuy whichever currency we're using eso in this example let's say we are opening account in Britain. Our account is in GBP currency. So how that conversion will look like because the the broker provide you the pip values in dollars. Okay, so we need to convert that into GDP. So let's move forward. 5. How to calculate pip value with GBP account: Okay, now things are getting excited. Now let's learn how we can identify a pep value. Based on that count we have. So we're resuming. We have open account in Britain. So our brace currency is GBP on. We open a micro account with £1000 deposit. Overcome type is micro. So which means every time we will place one lot trade, the broker will place 1000 units on our behalf. So with this in mind, let's take an example off us. T J P Y pair, assuming the current price is 104.8 Okay, that's the price. On which day US GDP, why is trading at the woman and we know that affects CM court two decimal points for JP wiper. One peep move will be 0.1 if we multiply that with the number off units that broke herbal trade which is 1000 units so 0.1 multiplied by 1000 units on. We need to divide that with the exchange rate off us. T. J P Y pair on that will give us $0.9. As I mentioned in the beginning off this slight that our account is in GBP. The figure we received is in dollar. We need to convert these dollars into pound. So how we will do it. So we will divide this figure with the exchange rate off GBP usd pair. So that will give us zero porn £06 as a paper value. Don't worry for its confusing, we're gonna have another example in the next life. So the thing which I want you to look into our the important point is why we divided $0.96 with GBP USD exchange rate, which is 1.434 sex. Why we didn't multiply it. Okay, so there is a basic phenomenon behind it. Let me explain this in a second slide. 6. When to multiply or divide Exchange rate for conversion: Okay, Now let's understand when to multiply on went to divide exchange rate Whenever GDP appear on the left hand side off the court, it exchange rate we divided. Otherwise we multiply it. Okay, let me explain that for example, our account is in GBP. We want to trade us d j p y pair. So in simple words were telling broker that we have account in sterling but we want to buy or sell USD against J p Y pair so the convergenet to take place in order to buy or sell ust because our base currency in GDP So what happens basically in a U S GDP y pair? When we tell the broker that by USD against J p y, then obviously we first calculate the pep value which is again the fractional move which is 0.1 for the J B y pair multiply by the 1000 units on divided by the exchange rate off us djp. Why the amount we will get will be in the dollar. So in order to convert that dollar amount into pound, we will divide this with the GDP USD exchange rate. Now, if you notice down the exchange rate Haas to be between the currency that we are trading on the currency. We have received the pips value in Okay, So Paparelli received in USD on we are based currency is in GBP so the pair is gbp USD on because the G B p is appearing on the left inside we divided Alexei, if we are treating your USD in which we are telling the broker that our account is in GBP on we want to trade, buy or sell euros for the sake of conversion So the pip value has to be converted into GDP now since we are creating the euro in this particular example of a recount is in GBP. So the pair we have is your own G B p for the exchange rate on if you notice the G B B appearing is on the right hand side off the pair so we will multiply. If the G B B appears on the left hand side off the bear. Then we divided so simple. So in this example, the U. S. GDP why exchange rate? We will divide it on the papal will be 0.6 on in your USD the pep rally will be 0.7 on. We will multiply it with a Euro GP. I hope this concept is clear. If you're still confused by all means talk to question and I will be happy to answer, so let's move forward. 7. How to calculate Risk Per Trade: Okay, Welcome back. Now we are going to talk about what is a risk before opening a trade. You want to identify how much you are willing to invest into any trade that you're going to commit. You have open your account, let's say for $10,000 and you want to risk 2% off your equity or your balance each time when you open a trade so the two person off 10,000 will be $200. So whenever you will open an account, whatever the remaining balance would be, you will calculate 2% off guard on open Another trade are usually the traitors. They don't Chris more than one or 2% but that is the risk appetite off individual trader now, since we know how we can collect the pep value and now we know how much risk we are going to take in terms off money. Now let's map this information with stop loss. I'll see you next line 8. How to Calculate Stop Loss Pips: Welcome back. Now we are going to talk about stop loss. What is stop loss? It's surprise at which we are willing to exit over trade. For example, if our buys waas the market want to go down? Andi, in case if that doesn't happen on the market, reverse at what price? We're willing to accept the laws and get out off the market and that prices gold stop loss . So the stop loss is a price at which we are willing to exit from the trade. Considering this example, we have a chart in front of us. It's the US djp by Chart Alexei, our strategy walls. We wanted to take a short trick at the break off the price one of $7.030 Okay, we can place our stop loss on the previous swing high on that price. Waas one or 7.174 Now the difference between our entry price and to stop loss prize will givers stop Los Pepes. So these are the pips that were willing to risk in order to make 5 10 or 15% whatever the amount we are going to or the person that we are going to target. Okay, so in this particular example, our enterprise waas one or 7.30 and I'm a stop loss price waas 17 dot 174 So the difference between these prove prices waas 14 pips, these 14 peeps will require to calculate what, lord size or position size we need to use men. We will open the trade. Okay, so now we figure out how to calculate, stop loss or stop Los Pepes. Let's take another example Now, this is a GBP USD chart on in this example we thought at the break off the price one point for 38 to 0 we want to go long, okay? Or you know, the the structure wise, we want to take a trade when the previous structure get violated or the market breaks the previous structure. Okay, so our entry price was 1.43820 on we put to stop loss on the previous Spain low on that price was 1.433 to 4 on the difference between these surprises was 40.49 which was basically for nine pips. So that's how we calculate the Pips we are going to risk on the person date we're going to make. So since we now know the number of Popes were going to risk, we can give these pips value because now we know already know how we can calculate a paper value. Okay, now let's put everything in a formula that's gonna give us the Lord size that we actually need to select, which will map with our risk amount, which is $200 on also and also a lost protection while putting stop loss. Right, I'll see you in the next life. 9. Position size formula to calculate Lotsize: Okay, Welcome back. Now let's put together everything we have learned so far. Now, this is the formula that we are going to use to calculate a lot size. So for this, as you notice, we have already learned how to calculate the percent age off equity that we want to trade. And also, we have learned how to calculate the Pepes that we want to risk for the trade. Now, of course, the pit value. We already know how we can calculate that. On combining this, we will get a lot size. So the formula would bay the percentage off equity divided by the Pips that we're risking and multiply by paper value. So in our case, we are risking $200 divided by 23 pips that we're risking and multiply by the pick value, which is 0.6 for your USD. On that will give us lot size off 0.52 So, based on our account balance, we will be opening trade with 0.5 to lot size on that will be equal to $200 worth off risk . Okay, now, let's have a look into the excellent you that I'm sharing with you in this course now is the execute that I'm providing you with in this course, you can download it from the resource section in a very simple form. I have provided you all information. All you have to do is to fill in some numbers and it will tell you the large sites that you need to call. Okay, so our total equity is $10,000. Basically GBP okay on. We're risking 2% off our account, which will be $200. Okay, So what we have to do is to change this. Okay, let's say we want to raise just 1%. It will change it accordingly. Want to change it to 2%? And this is $200 that we want to risk on the pips. We know how we can calculate the pips that we want to risk. So these are the people who want to risk. We will take a an example just in a minute, and I will show you how to calculate this on a actual chart. Okay, So the risking perhaps 23 on the paper value, we know how to calculate the paper value. Um here of three pairs that have selected. If you click on on there according to the count size, you have, for example, standard mini or micro. If you select them, it will show you the formula. Hair on the left top corner. Piccoli the number off large size on the courted value multiplied or divided by Jimmy. Be okay for the euro. Ust it's 0.8 Let's change this to 0.8. So the Lord size we can use is 0.7 will risk $200. Our gain should be 5% off. That's so we will risk $200 to make $1000 which is five times our anyhow investment. Okay, I will provide you this exercise. You can play with a on, uh, you know, conduct your own analysis on top offered, and please do share in the in the common section. Now let's look into the chart on conduct alive analysis 10. Practice Example Trade with position sizing and trade management: Okay. Welcome back. Now. Super excited. We are going to implement what we have learned so far. Okay, So this is the activity I want you to do as well. Just pull out any chart conduct analysis. You know, put your stop loss. Calculate your risking papers. Calculate your race to reward. Andi assumed the account balance that you have. And based on that tractor, fill in all the details and send me the picture. Okay. Oh, you can upload it in the comments section. Now let's jump into the chart straightaway. Okay? We are in the euro. Ust daily charge. Now we're trying to build our buys that we're thinking if the market will break these lows over here, we will expect market to go down. Okay, So what? We are saying it on the break off base section, the one we have highlighted with the black line. We're thinking the market will go. Don't. OK, so that's our thinking. Then we have to think about what will be our stop loss, if that's our entry point. Okay, so let's labor leg. That's our entry point. Okay? If this is our entry point, we want to play stop loss right above to the previous high. So this one, we think this one plus a few peeps about that will be our stop loss price. So we calling this stop loss, right? So the difference between this price one point a double to 435 aunt A 1.24780 will be over pips that we will be risking. Okay, so let's calculate quickly. So our entry price is a price one point double to 435 on our A sell stop loss is 1.2479 aid . So the difference between these through prices will be the number of peps we're going to risk. Okay, So if we quickly subject this, that gives us 0.2363 So the pips we will be risking is 236 because fx iam court four digits after the decimal point. Okay, so the paper we will be risking is 236 paps. Okay, so let's check this out. I use this ruler on there. You go to 236 Peps roughly. We will be risking. OK, now we know the entry point we know the stop loss. What if we are wrong and you know we want to be out off the trade? That's our stop loss. So what we will do will place a pending sell stop order. If the price break this, it will take our order on this high, become our stop loss. Okay, now let's head back to the Excel Sheet on Phyllis information. So we have a $5000 account. We're risking 1% portrayed. The trade amount we can use its A 50 on the risking pips. We said 236 peps. Okay, on the pip value, which is for the euro. UST micro count is 0.8 according to this one. So that gives us a lot size off 0.2 Okay, so we will use. Let's duplicate this. So the lord size you're considered to That's a lot side. We will select. We will enter the trade. Okay, Let's see if we have placed this trade. Let's play the market. There you go. The market took our order on Obviously you know, we must have selected some sort of exit strategy. Like either we are going to move our stop loss According to the Yeah, the structures or there is a set percentage we want to hit. In our case, we said 5% if the market gives us 5% were good on, you know, Happy Bunny. So that's how we place a trade. Just gonna pause this, Alexey. Actually, if the market has given us 5% or not, so that is roughly 33%. Not sure whether the market not sure if the walker gonna give us Mawr or Oh, pause this. I think it's gonna give us five. So that's our 5% when I squeeze the charge so we actually know where we are. Are we missed by one? Prepare. Okay. Just fun, fun thing. You know, you can back test your strategy any time. There was 5% recorded. Okay, so this is how you can place your trade. So I will strongly urge you to do this sort of analysis on your chart put. Stop loss there, Calculate the value. Assume the accounts we have on You know the balance you have. Calculate your arrest a reward and just share your picture. You know I will love to see how you will conduct your analysis and especially how you will calculate your Lord size with this application. Right now, let's head back to the money management side, which sounds very complex, but actually it's not OK, so let's break that down. The strategy I use, I'm going to share with you. 11. Money management strategy and compounding: Welcome back. I hope you have enjoyed this score so far. And now let's talk about the money management. Money management is the single most important factor that defines a success off any trader . I would say 60 to 65% off trading is money management and then and remaining psychologically and your strategy. Talking specifically about the money management to strategy I use. I'm going to share with you. Okay, so let's say if you have account with starting balance off $10,000. So what do you need to do is to divide that account into a portion. You will trade half off it on behalf you will keep it reserved for margins. And, you know, for your open positions let's say you risk 1% off half off the abortion, which will be $50. Okay, on you will have a chance to make 100% in 100 trades. You won't believe me. Okay, let's let's do some mathematics. Okay? So let's find how this this can be possible. Rule is very simple. Each time when we open a trade, we try to hit 5% gain. If we lose, we lose. If we win, we win five times. Okay, no matter what strategy, use you use breakout patrons demand and supply harmonics, astrology or, you know, flipping quite anything. As long as you are sticking to your plan on you are targeting 5%. You will end up making more money. Ask a bear to losing, okay, Because losing money is a part of the game. Okay, Sometimes you will have a Siri's off losses in, you know, during your training session. So as a trader, you have to console yourself to to be determined to be resilient on. You know, that's where your success factors like. Okay, let's say you have a proven strategy, okay? Onda strategy is only giving you 30% winning and 70% losses. Okay, I'm repeating 70% losses. Okay? How? You still can make money. So how do you think you have a strategy that is making you 30%? When, What? 70% losses. Okay, so the 70 times you lose and you only win 30 times, But each time when you win, you hit your 5% target, okay? To risking 1% off your account and you getting 5% if you win it so Here's the mathematics. Look like you take 100 trades off $5000. Okay, So each trade you takes you risk 1% off your ah, the portion that you're trading. Okay, so in this example, it's a $50 so 70 trades multiplied by $50. So you lose $3500 in the 70 strikes. Okay, let's say you took 70 trades straight in and roll and you lost them. One can imagine what could be the, you know, psychological effect off that. But that's how it is. OK, sometimes you will have Siri's off losses in trading career. You lost 3500 but you only one 30 times, which is five times again. Obviously you will be making on your initial investment. So you risk 1% which is $50 on. You gain five times off that in 30 trades. That gives you 7000 and $500 for the next game. You will have is $4000 surprising. So you only have to be right 30 times 30 times in order to make money. Yet there are further strategies as well. So this is the one I most commonly used. So this is I'm sharing with you. OK, so now let's looking to the compounding side effect because that looks very promising. What compounding I do for you. Amazing results. OK, so like we pull up that except you, that I've shared with you on the second sheet which I did not rename, just left it out of surprise. It's ethically called second sheet that gives you a compounding table. Eso what it is explaining. Basically, let me just zoom in. So is telling you your initial balance, which is a $5000 on you risking 1% which is a $50. Your gain will be 7500 based on the your 30 winning straight. Your losses will be 3500 based on 70 traits neck profitable before 1000. So next time this 4000 will add up into your initial balance so your natural balance will become 9000. Then you will trade one person off. That that will be a $90 on the same thing goes over and over and over and again. OK, your account will turn into 100,000 and nearly in the seventh round and obviously you can hit your 1,000,000 very, very soon. Port. This is a strategy that have to be mechanically managed to. This is the strategy I use, which you know, if you if you like it if you if you see potential and not use it on the demonstrate, see what results you get and then you know you can make it apart off your trading our snow . Okay, so thank you very much for sticking around and accompanying the scores. Aziz said, You know, you have to repeat this till you make your target or design income for okay. I do have other classes available. Hair related to trading. If you find time, please do check them. Make sure you rate the content so it become valuable for other people as well. Thank you very much for your time. I look forward singing you in my other classes, but by