Calculating The Number Of Units To Purchase

Once you know the price where you want to enter a trade, and you have calculated where you want to put the stop loss, do this:

1. calculate the number of pips between the entry price and the stop loss (e.g. 15 pips).
2. calculate how much of your account balance you want to risk (e.g. 2%).
3. calculate how much that means in terms of dollars to risk (e.g. for an account balance of $2625, 2% would be $52.50)

So, you want to risk $52.50, and there are 15 pips between the entry price and stop loss price.

From these numbers you can work out how many units to purchase.

It varies though between currencies. It goes back to the calculations above of how many US$ a pip up or down is worth.

Those calculations were when 1 contract (100K) was purchased. What you need to do is alter the actual number of units to purchase until you are risking a maximum of $52.50.

Taking the simplest example - where USD comes second in the pair - buying 1 contract means 1 pip is worth US$10.

If we bought 1 contract of EURUSD, say, then losing 15 pips would be losing $150. That's too much. We have to buy less than 1 contract.

Instead we go like this:

$52.50 to risk / 15 pips = $3.50/pip

We want to risk $3.50 per pip. It's $10 per pip when you buy 100K units, and so in this case it's the ol':

$3.50/pip is to ? as
$10/pip is to 100K

And the answer is 35K units. The numbers are not always so nice though - just make sure you're risking a maximum of 2% (in this case).

At Oanda, you can buy 35K units. You can also purchase 35K units at brokers that offer 1K unit purchases.

But if the broker only allows purchases in chunks of 10K units, then you can only purchase 30K units. Because you want to risk a maximum of 2%, so you can't buy 40K units.

If the broker only allows purchases in chunks of 1 contract, then you cannot take this trade - you'd be risking more than your maximum % if you did so.
 

Margin Rate Is Therefore Not Important

When we calculated the number of units to purchase, we didn't actually use the margin rate anywhere. (The margin rate being the "1:100" thing).

To say it another way, the margin rate is therefore not important when calculating how many units to purchase. It is also not important when calculating how much we will win or gain on a trade.

It is only important when calculating how many units we can purchase.

Because we bought 35K units of EURUSD, we will win or lose US$3.50 per pip regardless of if our margin rate was 1:10 or 1:100.

But margin rate tells us "can we buy 35K units?". The separate question of "should we buy 35K units?" is between you and your life-partner :-)

A margin rate of 1:100 is only risky when you abuse it and buy too many units relative to where your stop loss is.

How many units you purchase, and the distance between your entry price and the stop loss, are all important.

It shouldn't take long to create an Excel spreadsheet or something to help you do these calculations.