Position Sizing Guide: Calculate Your Trade Size Correctly

The Importance of Position Sizing

Position sizing is arguably more important than trade selection. Perfect entry signals mean nothing if you're trading too large or too small. Correct position sizing protects your account during losing streaks and maximizes profits during winning streaks.

The Position Sizing Formula

Breaking this down:

• Account Risk: Your maximum acceptable loss (e.g., 1% of $10,000 = $100)
• Pips at Risk: Distance from entry to stop loss (e.g., 50 pips)
• Pip Value Per Lot: How much each pip is worth for 1 lot (e.g., $8)

Step-by-Step Position Sizing Example

Your Parameters:

• Account: $10,000
• Risk per trade: 2% = $200
• Entry: EUR/USD at 1.2500
• Stop Loss: 1.2450 (50 pips away)
• Pip value: $8 per pip (1 standard lot)

Calculation:

1. Max loss allowed: $200
2. Pips at risk: 50
3. Max loss per lot: 50 pips × $8 = $400 per lot
4. Position size: $200 ÷ $400 = 0.5 lots (50,000 units)

Position Sizing by Account Size

Small Account ($1,000-$5,000):

• Use micro lots (0.01) for $0.08 per pip
• Risk $10-25 per trade maximum
• Focus on accounts that allow micro lots

Medium Account ($5,000-$50,000):

• Use mini lots (0.1) for $0.80 per pip
• Risk $50-500 per trade maximum
• Can trade multiple pairs simultaneously

Large Account ($50,000+):

• Use standard lots (1.0) for $8 per pip
• Can risk $500+ per trade
• Can trade multiple timeframes and pairs

Common Position Sizing Mistakes

Mistake 1: Trading the same lot size regardless of stop loss distance. A 50 pip stop requires different size than 100 pips. Adjust size based on risk.

Mistake 2: Risking more than 2% per trade. This accelerates account drawdown. Most pros risk 0.5-2% maximum per trade.

Mistake 3: Increasing size after wins. Many traders risk too much after a few wins, then lose it all on one bad trade. Maintain consistent position sizing.

Mistake 4: Using round numbers instead of calculating. Always calculate exactly. 0.32 lots is better than rounding to 0.3 lots if your calculation shows 0.32.

Position Sizing for Different Trade Types

For Scalp Trades (5-20 pip targets): Use smaller position size due to frequent trades. The compounding effect of many small wins requires consistent sizing.

For Swing Trades (100+ pip targets): Can use larger position sizes since you take fewer trades. Your account needs the capital to survive the higher pip-loss trades.

For Breakout Trades: Use standard position sizing based on stop loss distance. Breakouts often have wider stops due to volatility.

Position Sizing During Drawdowns

Professional traders reduce position size during losing streaks:

• After 2 consecutive losses: Reduce to 75% of normal size
• After 3 consecutive losses: Reduce to 50% of normal size
• After 4 consecutive losses: Stop trading and review strategy

This protects your account during natural drawdown periods.

FAQ

← Back to Blog