Being able to size your positions correctly to achieve a specific risk level for your trade is essential. Without know-how to size your positions, it’s impossible to achieve consistency as a trader; without a consistent position sizing approach, your results will be all over the place. A ‘wrong’ position sizing approach can even turn a potentially profitable trading strategy into a losing one.
Getting the position size right is super easy and it follows 4 simple steps:
Step 1: Stop loss distance
It is important that you always start with this point. A big problem that many traders have is that they approach to position sizing completely wrong and they set their stop loss distance last.
So, before you enter a trade, know where your stop loss will go. Then you measure the distance between the entry price level and the stop loss level. Never ever manipulate your stop loss distance to achieve a certain position size – never set your stop closer because you want to buy more lots.
In Forex, the stop loss distance is usually measured in pips where a pip is one price unit. When the EUR/USD, for example, moves from 1.4000 to 1.4001, this equals 1 pip.
Step 2: Define the risk level of your trade
How much money do you accept to lose on the trade when your stop loss gets hit? Usually, traders risk a certain percentage amount of their account.
Again, don’t just buy a random lot size and then adjust your stop loss to achieve a certain risk level. A stop loss always must go at a reasonable price level based on chart context. Furthermore, the risk on a trade is usually determined by the quality of the setup; risking more on good setups and reducing risks on mediocre setups is called variable position sizing and this concept is used by trading professionals and in other odds-based activities.
Further reading: Why you have to grade your trades if you want to trade successfully
In the table below we put together a few examples of how different %-levels vary for account sizes.
|Account size||1% risk per position||3% risk per position||5% risk per position|
|$ 1.000||$ 10||$ 30||$ 50|
|$ 5.000||$ 50||$ 150||$ 250|
|$ 10.000||$ 100||$ 300||$ 500|
|$ 25.000||$ 250||$ 750||$ 2.500|
Step 3: Introduction to lot sizes and pip values
In Forex trading, the position size is determined by the amount of “Lots” that you trade. There are 3 different Lot types in Forex trading: Standard Lots, Mini Lots, Micro Lots
Depending on which size you trade, the pip value changes. Here are a few examples:
1 Standard lot >> 1 pip is $10 worth
1 Mini Lot >> 1 pip is $1 worth
1 Micro Lot >> 1 pip is $ 0,1 worth
10 mini lots equal 1 standard lot and 10 micro lots are the same as 1 mini lot.
Pip-values differ for different currency pairs. Here is a list of currency pairs and how their pip value changes for different currency pairs: Pip value for Forex pairs
Final step: Find the correct lot size based on stop distance
Now we just need to put it all together and figure out how many lots you must buy (sell) to achieve a certain risk size. In the table below, we have put together a few examples. Here is also a general formula that you can use:
General formula: (Risk per trade) / (Stop loss in pips) = mini lots
Example: Account $2.000, 2% risk per trade = $40 | Stop loss distance 50 pips
Result: $40 / 50 = 0.8 à You need to buy 0,8 mini lots or 8 micro lots
|Stop Loss Distance||$5 risk||$10 risk||$20 risk||$50 risk||$ 100 risk||$ 200 risk|
|5||1 mini l.||2 mini l.||4 mini l.||1 standard l.||2 standard l.||4 standard l.|
|10||5 micro l.||1 mini l.||2 mini l.||5 mini l.||1 standard l.||2 standard l.|
|20||2 micro l.||5 micro l.||1 mini l.||25 micro l.||5 mini l.||1 standard l.|
|30||1 micro l.||3 micro l.||6 micro l.||16 micro l.||33 micro l.||66 micro l.|
|50||1 micro l.||2 micro l.||4 micro l.||10 micro l.||2 mini l.||4 mini l.|
|75||Account too small||1 micro l.||2 micro l.||6 micro l.||13 micro l.||26 micro l.|
|100||1 micro l.||2 micro l.||5 micro l.||1 mini l.||2 mini l.|
Tip: Create your own position sizing cheat sheet. You only do it once and then just update it from time to time, but it will help you make more consistent decisions and save time during your trading day when you want to figure out your position size.
Why your position sizing should be consistent
Most amateur traders don’t spend enough time considering position sizing because they don’t understand the importance of it. Keeping the position size of your trades constant allows you to grow your account steadily and avoid volatility. A trader who is inconsistent with this position size may end up giving more weight to some trades, without even knowing it.
Yes, it does take a few moments to figure out the right amount of lots to buy or sell, but a trader who skips this step does not have the right attitude and will have a hard time making it in this business.
Position sizing is the only component of your trades where you have TOTAL control over so it is important that you familiarize yourself with this topic.
Myth: Trading without a stop loss?
As you can see, you cannot determine your position size without having a stop loss in place. Many traders believe that trading without a stop loss has benefits, but it’s simply not true. Without a stop loss, there is no way you can set your position size the right way and your trading will be all over the place.
Small deviations in lot size or stop levels can lead to huge difference in the risk and the money lost on a trade. Keeping your position size consistent is essential if you want to achieve consistent trading results.