Sizing a gold trade

Position size is the one number you fully control. Work it out from your risk and your stop, and never from how sure you feel.

The formula

Position size = Risk amount / (Stop distance x Value of a $1 move per lot)

A worked example

These numbers show the maths. They are not a trade idea.

• Demo balance: $5,000
• Risk per trade: 1%, which is $50
• Stop distance: $5 from entry
• Value of a $1 move: $100 per lot

Position size = 50 / (5 x 100) = 0.10 lots

If price hits your stop, you lose about $50 plus costs. At 2% risk, the same trade would be 0.20 lots and about $100 at risk.

Our 3:1 minimum

We only consider trades where the target is at least three times the stop distance. With a $5 stop, the target must be at least $15 away, for a possible $150 on 0.10 lots.

A 3:1 ratio does not make a trade likely to work. Wider targets are reached less often. It means you could be wrong more often than you are right and still have room to cover your losses, before costs.

Key point

If the correct size feels too small to be exciting, it is probably right. If your platform's smallest size risks more than your limit, skip the trade.