What volatility does to your position sizeThe same one lot can risk $200 in a quiet week and $800 in a busy one. Nothing about the trade changed. The market did, and the position did not follow.Position sizing: how to calculate trade size
Two traders take the same trade, at the same price, with the same stop. One loses 1% of their account and the other loses 10%. The only difference between them is a number they chose before entering.
Ask most traders how big their position should be and the answer comes from the platform: the margin was available, so the trade was possible. That reverses the calculation. The size of a position is not a consequence of what your broker will permit - it is a consequence of how much you are prepared to lose if you are wrong.
Start from that number and everything else follows from it.
How much am I prepared to lose if this trade does not work?
The one formula
Whatever the market, the calculation is the same: the money you are willing to lose, divided by what one unit loses between your entry and your exit.
For shares, risk per unit is the distance between entry and stop. For forex it is that distance in pips multiplied by the value of a pip. For an index CFD it is points multiplied by value per point. The arithmetic never changes; only the unit does.
A trade, sized properly, start to finish
A $10,000 account taking a EUR/USD trade. Six steps, in this order - and the order is the point, because reversing it is how traders end up moving a stop to fit a position they had already decided on.
$10,000 account, 1% risk, EUR/USD
- 1. Account equity$10,000
- 2. Risk per trade1% of equity$100
- 3. Entry, then where the idea is wrong1.0850 → 1.080050 pips
- 4. Pip value the risk allows$100 ÷ 50 pips$2.00/pip
- 5. Convert to lots$2 ÷ $10 per standard lot0.20 lots
- 6. Margin needed at 1:30$20,000 ÷ 30$667
Position0.20 lotsMargin is checked last, not first. It confirms the trade is possible; it never decides how large it should be.
Wider stop, smaller position: not more risk
This is the relationship that makes the whole method work, and the one most people find counter-intuitive. A trade needing a wider stop does not have to risk more money. It just has to be smaller.
The same $200 at risk, across four different stop distances.
| Distance to stop | Position size |
|---|---|
| $2 | 100 units |
| $4 | 50 units |
| $5 | 40 units |
| $10 | 20 units |
Every row risks $200. A volatile instrument needing room is not automatically a bigger risk - it is a smaller position.
Pip values are not always $10 a lot
The familiar figures - $10 a pip for a standard lot, $1 for a mini, $0.10 for a micro - hold when the US dollar is the quote currency and your account is denominated in dollars. EUR/USD and GBP/USD in a USD account behave exactly like that.
They stop holding for USD/JPY, EUR/GBP, GBP/JPY and anything where your account currency is not the quote currency. Then the pip value depends on the prevailing exchange rate and needs converting into your account currency before the sizing calculation means anything. Most platforms will compute it; the mistake is assuming the round numbers apply everywhere.
Why 1% rather than 10%
The usual argument is that losing streaks happen to profitable strategies, which is true and insufficient. The stronger argument is arithmetic: percentage losses compound against you, and recovering from a large one requires a gain much larger than the loss.
What it takes to get back to where you started.
| Drawdown | Gain required to recover |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 40% | 66.7% |
| 50% | 100% |
| 60% | 150% |
| 75% | 300% |
Ten consecutive losses at 1% of current equity leaves about 90% of the account. At 5% it leaves 60%; at 10% it leaves 35%, and that account now needs to nearly triple to get level.
Sizing as a percentage of current equity has a useful side effect: as the account shrinks the positions shrink with it, which slows a drawdown automatically. A fixed dollar risk does the opposite - $100 is 1% of a $10,000 account and 2% of a $5,000 one, so the risk quietly doubles at exactly the wrong moment.
Five 1% trades are not 1% of risk
Position sizing done one trade at a time will still concentrate an account. Five open positions each risking 1% risk 5% of the account if they all fail together - and whether they fail together depends on whether they are really different bets.
Long EUR/USD, long GBP/USD, long AUD/USD and short USD/CHF look like four trades and are close to one: a bet against the US dollar. That is the subject of diversification, which for a trader is mostly about correlation rather than about owning more things.
Martingale, and why the arithmetic beats it
Doubling after a loss - $100, $200, $400, $800 - promises that one winner recovers everything. The sizes grow exponentially and an unremarkable losing streak demands positions the account cannot support. Eight straight losses starting at $100 requires a $25,600 trade to break even.
The opposite approach, reducing size as equity falls and increasing it as equity grows, is what percentage-of-equity sizing does automatically. It is less satisfying and it does not require you to be right at a specific moment.
Before opening a leveraged position
If any of these has no answer, the position size is a guess.
- What is my account equity today?
- What percentage am I risking on this trade?
- Where is the price that makes this idea wrong?
- How far is that from my entry?
- What is one pip, point or unit worth at the size I am considering?
- What position size does that produce?
- How much margin will it reserve?
- What else is already open, and is any of it the same bet?
- What is my total exposure against my equity?
- What would spread, commission and slippage add to the loss?
Questions people ask about position sizing
What is the 1% rule?
Risking no more than about 1% of account equity on a single trade. It is a widely used convention rather than a law, and the right figure depends on how many positions you hold at once and how correlated they are.
How do I calculate forex lot size?
Divide the money you are willing to risk by your stop distance in pips to get the pip value you need, then convert that to lots. $100 over a 50-pip stop is $2 a pip, which on a USD-quoted major in a USD account is about 0.20 lots.
Does leverage determine my position size?
No. Leverage determines how much margin the position reserves. Position size determines your exposure. You can have 1:500 available and choose to trade at an effective 1:2.
Is margin the same as risk?
No, and confusing the two is the most expensive error on this page. A $200 margin requirement does not mean $200 is the most you can lose.
Should I work out the stop or the position size first?
The stop, always. Deciding the size first creates pressure to move the stop somewhere convenient rather than somewhere meaningful.
Does a wider stop mean more risk?
Only if you keep the position the same size. Reduce the position in proportion and the money at risk is unchanged.
Can five trades risking 1% each lose more than 1%?
Yes - up to 5% if they all fail, and correlated positions make simultaneous failure considerably more likely than it looks.
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Nothing here is financial advice. Leveraged products can lose more than they make.
Other relevant articles
What volatility does to your position sizeThe same one lot can risk $200 in a quiet week and $800 in a busy one. Nothing about the trade changed. The market did, and the position did not follow.
Risk management: the whole accountSizing one trade correctly is arithmetic. Keeping an account alive across a hundred of them is a different job, and it is mostly about the losing streak you have not had yet.
Risk-to-reward, win rate and expectancyA 1:3 ratio is not better than 1:1. It is a different bet, requiring a different hit rate, and the ratio on its own cannot tell you whether a strategy makes money.