Risk Management, Contract Size, and Pips

Alright, very first post. Haven’t thought about the structure of the blog, but a key topic that comes to mind is Risk Management.

When trading, it pays to know the maximum of what you are risking each time you initiate a trade. A clear-cut way is by a percentage of the Balance of your account, AccountBalance(), or specifically your available Free Margin, AccountFreeMargin(), which is the Balance when you have no open positions, or if you do, the margin not utilised by them.

Simply, if I want to risk 3% of my $10k account. That’s $300.

So now the question becomes, how large a contract size should I trade such that if my stop loss is hit, it is going to be $300?

This is dependant on how many pips your stop loss is.

E.g. if your stop loss is to be 60 pips from your entry price, therefore, 60 pips = $300, making 1 pip = $5.

Before I go further, some definitions:-
Base Currency – USDJPY,  EURUSD, GBPCHF
Quote Currency – USDJPY,  EURUSD, GBPCHF
Deposit Currency – currency your Balance is in 

For pairs with Quote Currencies as USD, e.g. EURUSD, AUDUSD –
1 pip for 1 standard lot is $10, therefore, your contract size should be $5/$10 * 1 lot = 0.5 lots

For pairs with Quote Currencies as JPY, e.g. USDJPY, GBPJPY –
1 pip for 1 standard lot is $12.99 (as of 2012-01-06 close), therefore, your contract size should be $5/$12.99 * 1 lot = 0.38 lots (rounded down)

For pairs with Quote Currencies as CHF, e.g. GBPCHF, CADCHF –
1 pip for 1 standard lot is $10.47 (as of 2012-01-06 close) , therefore, your contract size should be $5/$10.47 * 1 lot = 0.47 lots (rounded down)

For pairs with Quote Currencies as GBP, e.g. EURGBP –
1 pip for 1 standard lot is $15.43 (as of 2012-01-06 close), therefore, your contract size should be $5/$15.43 * 1 lot = 0.32 lots (rounded down)

For pairs with Quote Currencies as SGD, e.g. USDSGD –
1 pip for 1 standard lot is $7.73 (as of 2012-01-06 close), therefore, your contract size should be $5/$7.73 * 1 lot = 0.64 lots (rounded down)

As you can see, the value of 1 pip is different for different pairs, however, since you have adjusted the contract size accordingly per currency pair, 60 pips will always be $300, or 3% of your $10k account.

I’ll elaborate a little bit more on pip value in my next post.