Step by-Step Guide to Calculating Position Size

If you've ever taken an exceptional setup and still lost more than expected, chances are the problem wasn't your analysis - it was the position size. Position sizing is the link between your thought process and your account's longevity. Follow these three steps and you'll know how much to take on before you click "buy or sell".

Step 1: Select risk per trade

Choose what percentage you are willing to lose from your account if and when your stop loss gets hit. Many traders use 0.5% - 2%. Less risk enables you to 

take more trades while making decisions cool headedly.

This figure is your risk in dollars for your next trade.

Step 2: Find your stop loss distance

Your stop should be where the trade idea has been invalidated - not where it "hurts less." Measure the distance between your entry and your stop loss:

Stocks/CFDs: stop distance in currency (e.g. $2.00 per share).

Forex: stop distance in pips (e.g. 50 pips).

Make a note of this number. You're going to need it in step 4.

Step 3: Verify volatility and context

A 20-cent stop on a quiet stock may work fine; on an earnings day, it may be a coin flip. Look at ATR, recent highs / lows, session ranges or news. If price swings are wide, widen the stop and reduce size (the maths will do this for you).

Step 4: The position-size math

Simple enough:

Position size = (Account size × Risk %) ÷ Stop distance

How you use it will depend on the market:

For stocks/CFDs (shares):

Shares = Risk ($) ÷ Stop distance ($ per share)

For forex (lots / units)

Lots = Risk ($) ÷ (Stop in pips × pip value per lot)

A handy reminder for USD-quoted major pairs, such as EUR/USD:

1 standard lot (100k) ≈ $10 per pip

1 mini lot (10k) ≈ $1 per pip

1 micro lot (1k) ≈ $0.10 per pip

Step 5: See it in practice – Two scenarios

Example A – Stocks

You have an account of $10,000, risk 1% → $100 risk.

You want to buy a stock at $50, with a stop at $48 (stop-distance $2).

So,

Shares = $100 ÷ $2 = 50 Shares

If your stop is hit, you are risking close to $100 (plus costs)

Example B – Forex (EUR/USD)

Account $5,000, risk 1% → $50 risk.

Entry 1.1000, stop 1.0950 → 50 pips

Pip value (per micro lot) → ≈ $0.10

So,

Lots (in micro) = $50 ÷ (50 pips × $0.10) = $50 ÷ $5 = 10 micro lots

Which is the equivalent of 0.10 standard lot (10k units). So a 50-pip loss is also ≈ $50.

Step 6: All checks in

Your broker will have minimums and increments (e.g. Set 1 share, Set 0.01 lots).If your ideal size is 37.5 shares, you are going to place 37 shares. In FX, if you calculated .13 lots and your platform is two decimals, place .

13 (or .12 if your platform only allows increments of .01). If you can't remember, always round down to ensure your risk is at or less than your limits. 

Step 7: Sanity-check the trade

Ask yourself two quick questions:

Does the position fit inside my daily risk? (i.e. I don't want to take on more than 2-3 losing trades per day of 1% each.)

Is the dollar risk, in my own psyche, acceptable? If it is going to risk $100, and that is going to tempt you into "revenge trading," reduce the risk. 

Step 8: Plan for correlation and multiple positions

If you are opening a few trades that effectively move together (i.e. EUR/USD and GBP/USD) you are effectively raising your risk. Divide the risk between the trades, or identify your best idea and take that. Survival above all else is better than missing out or leaving a trade on the table. 

Step 9: What if the size is too big or too small?

If the math would have you take a size that is greater than you are comfortable with - or, if size is very small, adjust the stop loss location or leave the trade. The position sizing was there to protect you - do not force a trade that does not conform to your rules. 

Step 10: Log it

You should log your account size, risk %, stop distance, and final size. A simple spreadsheet can make your process a habit - and makes the reviews you should be doing every week easy. 

Two quick rules of thumb

Start with 1% risk until you can prove you have an edge over 30-50 trades.

If you have metrics that (win ratio, payoff ratio, max drawdown) support increasing your size, do so slowly. 

Final thoughts 

Position sizing is not glamorous, but it is the part of your plan that will allow you to keep trading tomorrow. When you know your risk before you enter trades, your losses are controlled, your emotions don't run rampant, and your edge is able to show up.

If you would like more tangible examples, and templates, for risk management, visit the Learn section of Wikilix - there is plenty to help you develop a safer, steadier approach to the markets.