Why This Matters
Position sizing is the mathematical link between your risk management rules and your actual trades. Get this wrong, and you'll either risk too much (account blow-up) or too little (missed opportunities).
What is Position Sizing?
Position sizing is the process of calculating how many lots (units of currency) to trade based on:
- Your account balance
- Your risk percentage per trade (typically 1-2%)
- The distance to your stop-loss in pips
- The pip value of the currency pair
The goal: Ensure that if your stop-loss is hit, you lose exactly your predetermined risk amount - no more, no less.
Simple Example
You have $10,000 in your account and want to risk 1% per trade ($100). Your stop-loss is 50 pips away. Question: How many lots should you trade?
Answer: It depends on the pip value! This is what we'll calculate.
Understanding Lot Sizes
Forex is traded in standardized quantities called "lots." Here are the standard lot sizes:
| Lot Type | Units of Base Currency | Typical Use Case |
|---|---|---|
| Standard Lot | 100,000 units | Large accounts ($25,000+) |
| Mini Lot | 10,000 units | Medium accounts ($5,000-$25,000) |
| Micro Lot | 1,000 units | Small accounts ($500-$5,000) |
| Nano Lot | 100 units | Very small accounts (under $500) |
Lot Size Notation
In trading platforms:
• 1.0 lot = 1 standard lot (100,000 units)
• 0.1 lot = 1 mini lot (10,000 units)
• 0.01 lot = 1 micro lot (1,000 units)
• 0.001 lot = 1 nano lot (100 units)
Understanding Pip Values
A pip (percentage in point) is the smallest price movement in a currency pair. The value of a pip depends on the lot size and the currency pair you're trading.
Pip Value Formula
Standard Pip Values (for 1 standard lot)
| Currency Pair | Pip Value (Standard Lot) | Pip Value (Mini Lot) | Pip Value (Micro Lot) |
|---|---|---|---|
| EUR/USD | $10 | $1 | $0.10 |
| GBP/USD | $10 | $1 | $0.10 |
| USD/JPY | ~$9.17 (varies) | ~$0.92 | ~$0.09 |
| USD/CHF | ~$10.87 (varies) | ~$1.09 | ~$0.11 |
| AUD/USD | $10 | $1 | $0.10 |
Quick Rule of Thumb
For pairs with USD as the quote currency (EUR/USD, GBP/USD, AUD/USD, NZD/USD):
1 micro lot = $0.10 per pip
1 mini lot = $1.00 per pip
1 standard lot = $10.00 per pip
The Position Size Formula
Now we can calculate the exact position size needed to maintain your risk percentage.
Step-by-Step Calculation Process
- Determine your risk amount: Account Balance × Risk Percentage
- Measure stop-loss distance: Entry Price - Stop Loss Price (in pips)
- Find pip value: Use table or calculate for your pair and lot size
- Calculate position size: Risk Amount ÷ (Stop Loss × Pip Value)
- Round to nearest lot size: Your broker allows (usually 0.01 lots minimum)
Interactive Position Size Calculator
Calculate Your Position Size
Fill in your trade parameters to calculate the correct position size.
Real-World Examples
Example 1: EUR/USD Trade
- Account Balance: $5,000
- Risk Per Trade: 2% = $100
- Currency Pair: EUR/USD
- Entry Price: 1.2000
- Stop-Loss: 1.1950 (50 pips)
- Pip Value: $0.10 per pip (micro lot)
Calculation:
Verification: 50 pips × 20 micro lots × $0.10 = $100 loss if stopped out ✓
Example 2: GBP/USD Trade with Larger Stop
- Account Balance: $10,000
- Risk Per Trade: 1% = $100
- Currency Pair: GBP/USD
- Entry Price: 1.3500
- Stop-Loss: 1.3400 (100 pips)
- Pip Value: $0.10 per pip (micro lot)
Calculation:
Key Insight: Larger stop-loss = smaller position size for same risk amount.
Example 3: Small Account Strategy
- Account Balance: $500
- Risk Per Trade: 1% = $5
- Currency Pair: EUR/USD
- Stop-Loss: 30 pips
- Pip Value: $0.10 per pip (micro lot)
Calculation:
Reality Check: Many brokers require 0.01 lot minimum, so round to 0.02 lots (2 micro lots) = $6 risk.
Common Position Sizing Mistakes
Mistake #1: Using Fixed Lot Sizes
"I always trade 0.1 lots" is dangerous. Your risk changes with every different stop-loss distance. A 50-pip stop has different risk than a 100-pip stop with the same lot size.
Mistake #2: Ignoring Pip Value Differences
Not all pairs have the same pip value. USD/JPY and EUR/USD have different pip values, so the same lot size carries different risk amounts.
Mistake #3: Forgetting Account Currency Conversion
If your account is in EUR but you're calculating in USD, you need to convert. Always work in your account currency.
Mistake #4: Not Adjusting for Account Growth/Decline
Recalculate position size based on current account balance, not starting balance. As your account grows or shrinks, so should your position sizes.
Best Practice: Pre-Trade Checklist
Before every trade:
- Check current account balance
- Calculate risk amount (1-2% of balance)
- Measure stop-loss distance in pips
- Determine pip value for the pair
- Calculate position size
- Verify the calculation
- Enter the trade with correct lot size
Key Takeaways
Remember These Rules
- Never use fixed lot sizes - Always calculate based on your stop-loss
- 1 micro lot = $0.10/pip for USD quote pairs (easiest to work with)
- Larger stops = smaller positions for the same risk percentage
- Recalculate every trade based on current account balance
- Verify your math - One decimal point error can blow your account
- Use position size calculators until the formula becomes second nature