3 Steps to find your Value per Pip with Forex - 4 decimalsDo you know how much money you’ll risk every time you take a Forex trade?
To be an astute Forex trader, you’ll not only need to know your trading levels such as your entry, stop loss and take profit price, but you’ll also need to how much money to deposit into your trade to risk a certain portion of your portfolio.
We’ll go through a three step checklist, you’ll need to find your ‘value per pip’ which is also known as your ‘rands risked per pip’.
The ‘value per pip’ explained
The ‘value per pip’ is the amount of money in your portfolio that you’re willing to risk or gain for every one pip that moves in or against your favour.
If you choose a ‘value per pip’ of R5 and the market moves 20 pips away from your entry price, this means you’ll incur a R100 loss (R5 risk per pip X 20 pips movement).
Similarly, if the market moves in your favour of 20 pips, then you’ll be up with a gain of R100.
However, we all have different portfolio values and so the ‘value per pip’ will be different for each of us.
That’s why you’ll need a checklist to follow in order to find your ‘value per pip’.
3 Steps to find your ‘Value Per Pip’
Here are the specifics for the trade
Portfolio value: R50,000
2% Max risk per Forex trade: R1,000
Trade type: Buy (go long)
Currency pair: AUD/USD
Entry price: 0.7010
Stop loss price: 0.6970
Next, you’ll need to follow three steps:
Step 1:
Calculate the portfolio risk per trade
Before each trade you take, you’ll need to know exactly how much money you’re prepared to risk.
If you’re a risk averse trader, like me, you’ll risk 2% per trade.
If you’re an aggressive trader, maybe you’ll risk 5% of your portfolio per trade.
For this example, let’s stick to 2% risk.
You’ll then multiply your current portfolio amount by the risk percentage you’re willing to lose in the trade.
Here’s the calculation.
Risk per trade
= (Portfolio size X Max percentage risk per trade)
= (R50,000 X 2%)
= R1,000
R1,000 is all you are prepared to risk per trade, when your portfolio value is R50,000.
Step 2:
Calculate pips risked in trade
The next step is to calculate how many pips you’re prepared to lose between the entry price and your stop loss price.
As each pip movement is four decimal places on each currency, you’ll multiply the difference between the entry and your stop loss price by 10,000.
Here’s the calculation:
Trade risk in pips
= (Entry – Stop loss) X 10,000
= (0.7010 – 0.6970) X 10,000
= 40 pips
This means, you are prepared for the market to move 40 pips away from your entry before you’ll be taken out of your trade for a loss.
Step 3:
Find your ‘value per pip’
You now have all of the variables you’ll need, to calculate the ‘value per pip’ with your Forex trade.
Here’s the calculation.
‘Value per pip’
= (Portfolio risked per trade ÷ Pips risked in trade)
= (R1,000 ÷ 40 pips)
= R25
This means, on your trading platform you’ll type in, R25 for where it says ‘Rands risked per pip’, ‘Pip value’ or ‘Volume’, place your entry price at 0.7010 and your stop loss price at 0.6970 in order to risk R1,000 of your portfolio.
You have the three step checklist to find your ‘value per pip’ for every Forex currency that has decimals 4 points to the right.
Trade well, live free.
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Timon
MATI Trader
