Position Sizing
Position sizing calculates how much to trade so a worst-case loss matches your risk budget - the most important risk skill.
Position sizing sets how much to trade so a stop-loss equals your risk budget, commonly 1-2% of the account. It is the most important risk skill because it controls the cost of losing trades.
Position sizing is the calculation of how much of an instrument to trade so that a predefined stop-loss distance produces a predefined loss. The standard approach risks a fixed percentage of the account, commonly 1-2%, per trade: if the stop is 50 pips away and you risk $100, the position size is $100 divided by the 50-pip value. Position sizing is the single most important risk-management skill because it controls what no signal can: how much a losing trade costs.
How It Works
- Position size = risk amount divided by (stop distance x pip value)
- Risk 1-2% of equity per trade by default
- Scales down automatically when volatility and stops widen
Trading Tips
Size every trade from the stop, never from the chart's comfort
Correlated trades are one position - size a basket as a single risk
Consistent small risk beats variable big risk over a year of trading
Position Sizing Example
Say your account holds $5,000 and you risk 1%, $50. Your stop sits 25 pips away on EUR/USD at $10 per pip per lot. Divide $50 by $250 of stop value and you get 0.2 lots. The math decides, not your confidence.
How Traders Use Position Sizing
Fix the risk percent before you look at any chart, 1% while learning, and let every stop distance convert through it. Confidence should never change size. Only a proven edge over hundreds of trades earns a bigger fraction.
Related Terms
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