Position sizing: how to work out how many lots to trade

Position sizing is deciding how large a trade to open before you open it. Instead of picking a number of lots first and finding out afterwards what a losing trade would cost, you start from the loss you are prepared to accept and work backwards to the size.

It is a method, not a prediction: it does not tell you whether a trade will win or lose, and it does not make trading profitable. It makes the cost of being wrong visible before the trade is placed.

The calculation needs three numbers:

1. The amount at risk: the most you are prepared to lose on this trade if the stop loss is hit. This is a personal decision.
2. The stop-loss distance: how many pips the stop loss is from your entry price. It usually comes from the chart, not from the amount you want to risk.
3. The pip value per lot: what a one-pip move is worth on one standard lot. On EUR/USD it is about $10; on other instruments it is different, and the platform's symbol specifications show the contract size.

The pip and lot glossary entries explain both terms.

The stop-loss distance times the pip value per lot is the loss for one lot at the stop loss. Dividing the amount at risk by it gives the number of lots:

Lots = amount at risk ÷ (stop-loss distance in pips × pip value per lot)

For the same amount at risk, a wider stop loss gives a smaller position and a tighter one a larger position. Moving the stop loss to fit a size chosen in advance defeats the purpose of the method.

A hypothetical trader with a $1,000 account decides that $50 is the most they are prepared to lose on a EUR/USD trade. The amount is their own choice, not a suggestion. The stop loss is 25 pips from the entry.

Leverage does not appear in the formula. It decides how much margin a position needs, not how much each pip is worth. At a hypothetical setting of 1:200, the 0.2-lot position above ($20,000) needs about $100 of margin, and its profit or loss per pip is still $2.

What leverage changes is how large a position the account can open. With $1,000, high leverage could let the same account open 5 lots of EUR/USD ($500,000). On that position each pip is worth $50, so the same 25-pip move would cost $1,250, more than the whole account.

Traders usually set the amount at risk in one of two ways:

• A fixed cash amount: the same amount on every trade, until the trader decides to change it.
• A fixed share of the balance: recalculated from the current balance before each trade, so it shrinks after losses and grows after gains.

Trading books and forums often suggest specific figures. This guide does not recommend any amount or share: the figure depends on your finances, experience and objectives, and only you can set it. Whatever the method, a run of losing trades reduces the account.

• It cannot cap the loss: a stop loss can be filled at a worse price after a gap or in a fast market, so the loss can exceed the planned amount.
• It leaves out costs: spread, commission and swap are paid on top of the price move.
• It rounds: platforms accept sizes in fixed steps, such as 0.01 lots, so the result is usually rounded down, as in the example below.
• It sizes one trade at a time: positions on related instruments can lose together, so the total at risk can be larger than planned.