Sizing a forex trade

This calculation is the most useful skill in this track. Learn it, and use it on every trade.

The formula

Position size = Risk amount / (Stop in pips x Value per pip per lot)

Worked examples

These show the maths on EUR/USD, where a pip is about $10 per standard lot. They are not trade ideas.

At 1% risk

• Balance: $1,000, so the risk is $10
• Stop: 20 pips
• Position size = 10 / (20 x 10) = 0.05 lots

At 2% risk

• Balance: $1,000, so the risk is $20
• Stop: 20 pips
• Position size = 20 / (20 x 10) = 0.10 lots

Why percentages help

Risking a fixed percentage means your position shrinks as your balance falls. After 10 losses in a row at 1% risk you would still have about 90% of your balance. At 5% you would have about 60%.

The 3:1 minimum

With a 20 pip stop, your target must be at least 60 pips away. At 3:1, you would need to win about one trade in four to break even before costs. Spreads and commissions raise that figure, and a wider target is reached less often.

Key point

Your stop goes where the trade idea is wrong. Your size then adjusts to fit your risk. Never move your stop to fit a size you already wanted.