Foreign Exchange Position Management, Part 3 - Compound Position Size

In this lesson, we will teach you how to calculate a position size when the account currency is not the currency in the currency pair you want to trade.

The account currency is not any of the currency pairs being traded, but the relative currency of the converted currency

Zhang San is back in the United States, (we think he is actually a super spy, wandering around and saving the world). Today, he decided to trade EUR/GBP with a stop loss of 200 points. To find the correct position size, we need to determine the risks Zhang San is willing to take (in pounds).

Remember,The value of a currency pair is calculated in relative currencies.

Okay, let's get something straight. He went back to America, through AmericabrokerSell EUR/GBP. He is only willing to risk 1% of his $5000 account, which is $50.

To find the correct position size in this case, we need to know the GBP/USD exchange rate. Let's say the exchange rate is 1.7500, since his account is in USD, we need to convert the exchange rate and calculate the correct GBP amount.

$50 * (£1/$1.75) = £28.57

Now, the rest is the same as the other examples. Divide by the number of stop loss points:

£28.57/200 points = £0.14/point

Finally, multiply by the known unit/point value ratio:

£0.14/point * [ (10,000 units EUR/GBP) (£1/point) ] = approximately 1426 units EUR/GBP

To stay within a pre-set risk level, Zhang San cannot sell more than 1,429 units of EUR/GBP.

The account currency is not any of the currency pairs being traded, but the base currency in the conversion currency

Mr. Zhang decided to go skiing in Switzerland, where he used his super spy phone to open a trading account with a local forex broker. He spotted a good Swiss franc/Japanese yen move and decided to leave the trade if the currency hedge broke an important resistance level - about 100 points away from him. Mr. Zhang was willing to risk only 1 per cent of his SFr5,000 account, or SFr50.

First, we need to find out the value of 50 Swiss francs converted to Japanese yen. Since the account currency is the same as the base currency of the conversion currency, all we have to do is multiply it by the exchange rate of CHF/JPY (85.00).

CHF 50 * (JPY 85/CHF 1) = JPY 4,250

Now, the rest is the same as the other examples. Divide by the number of stop loss points:

4250 yen/100 points = 42.50 yen/point

Finally, multiply by the known unit/point value ratio:

42.50 yen/point * [ (10,000 units CHF/yen) (1 yen/point) ] = approximately 4,250 units CHF/yen.

To ensure that the loss is less than or equal to 50 Swiss francs, Zhang San cannot trade more than 4,250 units of Swiss francs/yen.