Currency (i.e. Forex) markets have fixed tick sizes (i.e. the size of the smallest possible price movement), but they have variable tick values (i.e. the value of the smallest possible price movement), so calculating the size of a trade on a currency market (i.e. the amount of currency that can be traded) is slightly more complicated than either futures markets or stock markets, but it is still quite straightforward.
Here's How:
Tick Size and Tick Value - The tick size is the smallest possible price change, and the tick value is the value of the smallest possible price change. The tick size is fixed for each currency market, but the tick value varies depending upon how much currency is being traded (i.e. the size of the trade).
For example, for the Euro to US Dollar currency market, the tick size is 0.0001, and the tick value can in theory, be anything from $0.0001 to an unlimited amount (e.g. $1,000,000 per tick), but the minimum and sometimes the maximum tick values are usually specified by the brokerage being used.
Maximum Acceptable Risk - The maximum acceptable risk is the amount of money that you are willing to risk for an individual trade, which obviously can be whatever amount you choose, but according to the 1% risk management calculation the maximum acceptable risk should be 1% of your trading account.
For example, for a trading account with a balance of $50,000, the maximum acceptable risk is calculated as the trading account balance divided by 100 which equals $500:
Maximum Acceptable Risk = $50,000 / 100 = $500
Trade Size - For currency markets, the trade size is the amount of currency that is traded (with the minimum in theory being $1 (or Euro, or British Pound, etc.)). The trade size is calculated using the tick size, the maximum acceptable risk, and the size of the stop loss.
For example, for a trade on the Euro to US Dollar currency market (which has a tick size of 0.0001), with a stop loss of ten ticks, and a maximum acceptable risk of $500, the trade size is calculated as the risk divided by the stop loss in ticks divided by the tick size which equals $500,000:
Trade Size = $500 / 10 / 0.0001 = $500,000
Example - The complete calculation for the trade size (as one formulae) is as follows:
Trading Account Size / 100 / Stop Loss Size (in ticks) / Tick Size = Trade Size
which for a trade on the Euro to US Dollar currency market, for a trading account with $20,000, and a trade with a stop loss of ten ticks, is as follows:
$20,000 / 100 / 10 / 0.0001 = $200,000
Different Currencies - Calculating the trade size for a trade on a currency market is quite straightforward when the trading capital is the same currency as the currency being used for the trade (e.g. a trading account in US Dollars being used to trade the Euro to US Dollar currency market). The calculation becomes more complicated when the trading capital is a different currency than the currency being used for the trade (e.g. a trading account in British Pounds being used to trade the Euro to US Dollar currency market), because the trading capital must be converted into the currency being used for the trade.
Different Currencies Example - The complete calculation for the trade size (as one formulae), when the trading capital is a different currency than the currency being used for the trade, is as follows:
Trading Account Size / 100 / Stop Loss Size (in ticks) / Tick Size * Exchange Rate = Trade Size
which for a trade on the Euro to US Dollar currency market, for a trading account with £20,000 (British Pounds), and a trade with a stop loss of ten ticks, is as follows:
£20,000 (British Pounds) / 100 / 10 / 0.0001 * 1.5000 (or whatever the British Pounds to US Dollar exchange rate is at the time) = $300,000 (US Dollars)
