# How to calculate transaction volume, pledge and point value?

One of the first decisions that you will have to make when you start making transactions with non-deliverable OTC financial instruments in the OTC Forex markets in Belarus, is the choice of transaction volume. The position volume depends on many factors, including psychological ones (emotional comfort, acceptable risk, etc.), but first of all, it should be connected with the risk management tactics that you plan to use. The fact is that when choosing the volume, you will automatically affect the size of margin collateral, as well as the cost of one point of price movement.

Margin

When you open a new position, you will have to bear some costs, which are known as margin. In principle, the margin can not be called the value of the transaction, rather, this amount of money on your account that freezes before opening a position and becomes active again when you close the transaction. Knowing the size of margin is very important, since you will approximately represent the initial risks, and you will also know how much money you can put into opening additional transactions.

In previous lessons on CFD transactions, we talked about the fact that you will not need to have the full amount of a potential transaction on your account since you will work with margin leverage. For example, with a leverage of 100, you will only need to have 1% of the nominal value of the lot to open a position.

Suppose you want to open a 1-lot transaction on a GBP/USD pair with a leverage of 100, but do not yet know what the nominal value of the lot for this instrument is.

On GBP/USD, the nominal value per lot is £100,000. If the margin leverage is 100, you will need to have only 1% of this amount on your account so that you can begin to make transactions with non-deliverable OTC financial instruments. It is easy to calculate that it will be £1,000 or the equivalent amount in dollars at current quotes (if you have a dollar account). In the example above, we see that the current price of the GBP/USD pair is 1,2497, so a deposit of 1 lot would be about 1,250 dollars.

From the point of view of risk management, the margin requirement is a very important concept, and there is a general rule that it is extremely undesirable to open operations with margin that accounts for more than 30% of the total capital.

Returning to the example above, if your initial capital was \$5,000 and you would like to open a transaction with a volume of 1 lot, then the necessary margin security would be about 25% (1,250/5,000 * 100%). This is an acceptable value. Although we recommend going further and investing in each operation no more than 15% of the capital.

If we take our \$5,000 and multiply them by 15%, we get \$750. This is the recommended margin size. In our example, the value of the pound to the dollar is about 1.25, so we will divide 750/1.25 and get 600 pounds of margin, which corresponds to the transaction volume of £60,000 (with a leverage of 100) or 0.6 lots.

Value of point

The second important factor for us is the cost of one point per trading position. In the process of investing, it is very important to represent the value of the point, since it is in them that the size of the price movement is considered, and therefore the risks are calculated. You should know how badly your investment portfolio will suffer if the price goes 50 or 100 points against you, and how much you will earn if a similar movement in your direction occurs.

In order to find out the cost of a point, you can again use our calculator built into the xStation platform.

However, for a better understanding, we will try to calculate the point manually. To do this, we will take the same GBP/USD pair of 1 lot. 1 lot is 100,000 units, and a point is the fourth digit after the decimal point or 1/10,000. Multiplying 100,000 * 0.0001 we get \$10. Please note that the value of the point is considered in the foreign currency of the quote (that foreign currency, which is in second place). Therefore, for those instruments where USD is in second place (EUR/USD, GBP/USD and other pairs), the point is always expressed in dollars. If the quote currency is one of the national foreign currencies (for example, a pair of USD/CAD), then the points will be in this foreign currency, for example, in Canadian dollars. And in order to find out the final value of the point, you will need to multiply the figure 10 * found above (the value of the pair USD/CAD) = the value of the point.

However, we will return to our pair GBP/USD. With a point value of \$10, we can pre-calculate any scenario. If the price of a pair goes in our direction and overcomes a distance of 100 points, we will get 100 * \$10 = \$1000. At the same time, if the market moves against us by the same 100 points, we will receive a loss of -100 * 10 = – \$ 1000.

Such calculations will help you assess at what level you should place orders to fix the price of the underlying assets of Stop Loss and Take Profit.

The basic idea is that you should not lose more than 5% of the total capital in one transaction. Why 5%? The fact is that the operation with non-deliverable OTC financial instruments is partly based on probability, and you must have a certain margin of safety of capital so that you can wait out a potential series of losses. Closing losses of 5% each time, you will need more than 10 transactions to lose half of the capital, and this is quite a lot. Although, if desired, you can take other numbers (for example, 8% or 10%).

Example:

You open a transaction for 1 lot at GBP/USD, where the cost of a point is 10 US dollars. You will also follow the rule not to allow losses greater than 5% of the total capital. Thus, if your total capital is \$5,000, then the maximum allowable loss is \$250.

If you know that 1 point costs \$10, and the maximum accepted loss is \$250, you just need to divide \$250 by 10 and you will get a maximum Stop Loss level of 25 points. If this is too small for your strategy, you can simply reduce the volume of the transaction. By opening not 1 lot, but 0.5 lots, all numbers are reduced by 2 times and in order to get a loss of \$250, you will need to lose not 25, but 50 points (the price of a point is \$5; Stop Loss \$250/\$5 = 50 points).