Where does leverage come into calculating position size (if at all)? - Singapore Forex Trading, Singapore Forex Academy, Singapore Forex Association

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Where does leverage come into calculating position size (if at all)?

First of all, your broker has a fixed leverage amount for your account.
So, you can't do anything about leverage from that end, but YOU control your leverage used by your lot size.

With that being said, forget about leverage, and figure what percent of your account you are willing to risk, and go at it from that angle.

The rule of thumb is usually 2% or so. Next you figure how big your stop will be according to your trade entry, and know your pip value based on that number.

For instance, if your account has a nice even $1000 in it, and you want to risk 2%, that is $20.

With $1000, you could trade a full mini lot of EUR/USD, but with a pip value of $1.00 each, that would only give you a 20 pip stop.

However, if you traded 5 micro lots, your pips would be valued at $0.50 a piece, and your stop would be 40 pips away. 1 micro lot at $0.10 a pip would let you place your stop 100 pips away, and so on.

Leverage has nothing to do with it, although your leverage changes each time you bump up your lot sizes. Here's the way it would work. At 100:1 leverage, your mini lot EUR/USD would use $133 or so as margin to enter the trade. You would have $866 of usable margin left. Technically, your leverage would not be 100 to one, because you are trading a 10k lot size with a mini. So, your leverage would be more like 10:1.

If you traded one micro lot, that would be a 1k lot size, and your leverage would actually be 1:1 because that is the amount in your account. (Although it is slightly higher in both instances, based on the EUR/USD conversion rate to buy into the trade)

So quick rundown. Find your risk level, whether it's 0.5%, 1%, 2% or whatever. Next, find your stop loss size according to pip value, and base your lot sizes off that to keep risk in check. And don't worry about the leverage number. That will work out all by itself if you do your math right.