Trading practiceUpdated 3 min readBy the FXNOD team
How to calculate the correct position size
To calculate position size, decide how much money you will risk on the trade, usually 1% to 2% of the account, then divide it by what you lose per unit if the stop is hit. Position size equals account risk divided by stop distance times value per unit. The stop decides the size, never the other way round.
The formula
Position size equals the amount at risk divided by the stop distance multiplied by the value of one unit of movement. Three inputs: how much you are prepared to lose, how far away the stop is, and what each point or pip is worth for one unit of the instrument.
Worked example: forex
Account and risk
The account is 1,000 and you risk 1%, so the amount at risk is 10.
Stop distance
The chart says the trade is wrong 20 pips away.
Value per pip
On a dollar-quoted pair, one pip on a mini lot of 10,000 units is worth about 1.
Size
10 divided by 20 times 1 equals 0.5 mini lots, which is 5,000 units or 0.05 standard lots.
If the stop had been 40 pips away, the size would halve to 0.025 lots. The money at risk stays at 10 either way. That is the point of the calculation.
How much to risk per trade
| Risk per trade | Account left after 10 losses in a row |
|---|---|
| 1% | About 90% |
| 2% | About 82% |
| 5% | About 60% |
| 10% | About 35% |
Ten losses in a row is not rare over a year of trading. At 1% or 2% it is a bad month. At 10% it is close to the end of the account.
Fixed-payout contracts: the stake is the risk
On options such as Rise/Fall or digit contracts there is no stop distance. A losing contract costs its whole stake, so the stake is the position size. The same rule applies: stake 1% to 2% of the money you have set aside, and the arithmetic of the table above holds exactly.
With a bot
For a flat-stake bot, size the stake against the session's stop loss: a stake of 2% of the stop loss allows fifty net losses before the session ends. If the stake grows after a loss, the position size that matters is the largest stake the settings can reach, not the first one. Work that number out before you start.
Mistakes to avoid
- Choosing the size first and then squeezing the stop to fit. The stop belongs where the trade is wrong.
- Using the same lot size on every trade regardless of stop distance.
- Raising the size after losses to recover faster.
- Forgetting that several open trades on related markets are one large position.
Questions people ask
- What is the 1% rule in trading?
- Risking no more than 1% of the account on any single trade, so that a long losing streak leaves most of the account intact.
- How do I calculate lot size?
- Divide the money you will risk by the stop distance in pips multiplied by the pip value of one lot. The answer is the number of lots.
- Should position size change after a loss?
- If you risk a fixed percentage, it shrinks slightly as the account shrinks, which is protective. It should never be raised to win a loss back.
- Does leverage change position size?
- Leverage changes how large a position your deposit allows. It does not change how large a position your risk rule allows. Size by risk, not by the maximum available.
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