Position Sizing

The formula

Lots equals risk amount divided by stop distance in pips divided by pip value per lot. With a 10,000-dollar account, 1 percent risk, a 40-pip stop and a pip value of 10 dollars per lot on EUR/USD: 100 divided by 40 is 2.5 dollars per pip, divided by 10 is 0.25 lots. Enter 0.25 and the trade cannot lose more than 100 dollars if the stop fills at its level.

The order of decisions

• Decide the risk percent for the account: 0.5 to 1 percent is standard for beginners, 2 percent is the upper end.
• Find the trade and place the stop where the idea is wrong, in pips.
• Calculate the pip value for the pair in your account currency.
• Divide, and round down to the platform's step.
• Only then look at the lot size; if it is below the broker's minimum, the account is too small for that trade.

Common mistakes

• Sizing first and fitting the stop to the size, which puts stops inside the noise.
• Using the same lot size for every trade regardless of stop distance, so risk varies wildly.
• Forgetting to convert pip value on cross pairs.
• Rounding up rather than down.
• Ignoring slippage: add a few pips to the stop distance when sizing for news or thin markets.

Why it works

Fixed fractional risk means a losing streak shrinks the account slowly and a winning streak grows it steadily, because each trade risks a percentage of what is there. Ten losses in a row at 1 percent leaves about 90 percent of the account. Ten at 5 percent leaves about 60 percent. Ten at 10 percent, which is what an unsized account often risks without knowing it, leaves 35 percent, and the trader is usually gone before the tenth.

Key takeaways

• Lots equals risk amount over stop pips over pip value per lot.
• Decide risk percent, place the stop, compute pip value, then size.
• Round down and allow for slippage.
• Fixed fractional risk is what makes an account survive streaks.