Sizing a position from the risk you accept

This is the most important calculation in trading and also the most frequently skipped. Beginners
tend to pick a size by feel; disciplined traders work backwards from the risk they are willing to
take.

1. The principle: risk decides size, not the reverse

The correct order has four steps:

1. Decide the maximum amount you are willing to lose on this trade.
2. Place the stop loss according to price structure, not
   according to money.
3. Measure the distance from entry to stop, in pips.
4. Work out the size that makes that distance equal exactly the amount from step one.

The common mistake is the reverse: choose the lot size first, then put the stop wherever the budget
allows — which leaves the stop somewhere technically meaningless, where it gets swept
repeatedly.

2. The formula

Lots = Amount risked ÷ (Stop distance in pips × Pip value for one lot)

3. A currency example

A $5,000 account, 1% risk = $50. Entering EUR/USD with a
25-pip stop. Pip value for one lot = $10.

50 ÷ (25 × 10) = 0.2 lots

4. A gold example

Gold is often miscalculated because the units differ.
One lot of gold is 100 ounces, so every $1 move in
the gold price is $100 per
lot.

Same account, $50 of risk, a stop $8 away in gold price:

50 ÷ (8 × 100) = 0.0625 lots, rounded down to 0.06 lots.

Plenty of people open 0.5 lots of gold on a $5,000 account because “0.5 sounds small”. That is
actually $400 of risk for the same stop distance — eight times the sensible figure.

5. The risk rules worth using

• 1% per trade is the standard for an account being built up.
• 0.5% or less while testing a new strategy or just after a losing run.
• No more than 3–5% of total risk open at once, counting correlated positions.

At 1% per trade, ten consecutive losses cost about 10% — uncomfortable but recoverable. At 10% per
trade, the same run all but erases the account.

6. Making it a habit

Set up a spreadsheet, or use the position size calculator
on most broker websites. Enter three numbers: balance, risk percentage, stop distance. It takes ten
seconds, and they are the most valuable ten seconds in your entire entry process.

This article is for information only and is not investment advice. Conditions and fee levels are published by the brokers and can change at any time — check with the broker you actually use. Leveraged forex and CFD trading carries a high level of risk and can cost you your entire deposit.