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Monday, October 15, 2012

Position Size Calculator for Metatrader

In this post I will talk about position size calculations in Forex, the importance of keeping a stable risk management (via position sizing) and the Position Size Calculator I designed for the Metatrader platform in order to make position size calculations easier for Forex traders.

(Click on Image to enlarge)

In Forex trading (and pretty much every trading for that matter) it is recommended that you maintain a specific maximum risk per trade and keep it constant. So, many experts suggest for example, risk 1% of your capital per trade, 2% etc. The idea makes a lot of sense and should be applied whether you trade a mechanical system or your discretionary ideas.

Even if you have a strategy with a positive edge, if you risk different amounts of capital per trade using the same strategy you're affecting that edge and possibly losing it. Imagine a strategy that wins 60% of the time, with winners being1.5 times larger than losers.Out of 10 trades, this strategy is bound to win 6 and lose 4. The four losers will lose 4% assuming a 1% risk per trade, and the 6 winners will yield 9%, as winners are 1.5x the size of losers. This means you are in positive territory by 9% - 4% = 5%. That's frankly some pretty solid results.

However, if you don't risk the same amount of capital per trade there's no way to guarantee the positive results as they become random. Imagine a trader with the same strategy of 60% winners, winner 1.5x the size of losers. Let's say that person stubbornly or unknowingly always trades a fixed amount of 0.1 lots. The problem is that if your stop loss is different across trades you will be risking more in some trades than others. A stop loss of say 50 pips deserves a smaller position size than a stop loss of 30 pips, but if the trader always trades a fixed position size then some of his losers might be bigger than the winners because more weight was inadvertently given to those losers via incorrect position sizes. This way, even though the strategy has a positive edge, the overall results are bound to be random as you're not distributing risk equally across positions. Your losers might come in when you inadvertently risked more and that will crush your long term results.

The Position Size Calculator (download free pdf manual of the indicator here)

Many Forex traders, even a few with some years of experience don't know how to correctly calculate position sizes in Forex to comply with a specific risk. The problem in Forex is that you are constantly trading instruments that are priced in currencies different from your account's currency. For example if I want to trade a EURGBP position and my account is in USD, how do I guarantee that my position size will represent a 1% risk per trade? I wrote the article Risk a percent of your account per trade over a year ago where it is explained how to calculate your position size correctly. The problem is that it takes time to follow all the steps, go to other sites, do your calculations manually etc. Some traders have an excel spreadsheet with formulas already put in place, but they still need to constantly update the currency pair's price before doing the calculations, and more importantly they also need to switch from their Meta trader platform out to Excel which is not ideal, making them lose time an effort. And even so, the process is obviously prone to errors.

That's the purpose of the Position Size Calculator Indicator.
With a very simple interface and concise, clear parameters, this indicator will tell you at all times the position size to trade on any currency pair based on the size of your account, leverage, your account currency, the risk per trade of your choice, and the price of the instrument you want to trade.

   
The position size is calculated after every tick from Metatrader and the result is reflected on the Chart with a color of your choice. Errors and warnings are also displayed at the bottom (in Red by default) that provides you with useful information as well as warnings.

 (Click on image to enlarge)

Obviously in order to do the calculation properly you have to provide the Indicator with your stop loss point as well. This information can be provided in two different ways. The trader can provide the stop loss as a number of pips, for example 50 pips. This will instruct the indicator to calculate the position size for the specified risk and a simulated 50 pips stop loss. That's the first way. The second mode is by specifying your stop loss as a price level on the chart. For example, you want to buy EURGBP and your candidate stop loss is 0.8020. What you do is you provide the Indicator with that price as your candidate stop loss, and the Indicator will calculate the difference in pips between that price level and the current price which varies all the time, and it will make the position size calculation for you.

Regardless of the method, the important thing is that the Indicator will recalculate the correct position size at every tick and will reflect it on the chart so that whenever you are ready to pull the trigger on your trade you will always know the proper position size without any manual process involved, which consumes time and it's always prone to error.

The Position Size Calculator works for the following 28 currency pairs:

EURUSD, GBPUSD, USDJPY, USDCHF, USDCAD, AUDUSD, NZDUSD, EURGBP, EURJPY, EURCHF, EURCAD, EURAUD, EURNZD, GBPJPY, GBPCHF, GBPCAD, GBPAUD, GBPNZD, CHFJPY, CADCHF, AUDCHF, NZDCHF, AUDJPY, AUDCAD, AUDNZD, CADJPY, NZDJPY, NZDCAD

It supports accounts on any major currency denomination. This is another of its strengths. If your account is in USD, EUR, GBP, JPY, CHF, CAD, AUD, NZD the software will take that into account during the calculation process and will accurately reflect the position size you need given your account currency.

As the Position Size Calculator is built as an Indicator you can attach it to a chart with an Expert Advisor without causing conflicts, which makes it even more powerful and flexible. Imagine you have an expert on your chart that gives you signals on when to enter a manual trade. At that point, if Position Size Calculator is present on the chart, you will read the adequate position size right there. Whereas if Position Size Calculator was built as an Expert it couldn't co-exist with another one on the same chart, forcing you to flip over charts to gather the information needed.

My plan is to extend this indicator to Metatrader 5 in the future and add support for commodities such as Gold, Silver, Oil etc. If you decide to purchase the indicator, you will receive all the updates in the future for free.

As part of your purchase you will also get a pdf Guide with Installation instructions and explanation of the different parameters as well as error messages and ways to deal with them. You can get the Guide for free if you want to know more details about the indicator

I hope this indicator becomes a useful tool in your trading, and that you can benefit from it.

Position Size Calculator $20.00

It is a one time payment only and you can use the indicator indefinitely in as many Metatrader accounts as you want. If you have any problem with the indicator feel free to contact me at traderlazy@gmail.com

For more indicators and tools visit the Products page.


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