Position sizing without guessing
The one number that decides how long you last, the arithmetic behind it, and the two mistakes that quietly break it.
PropSpread ResearchJul 30, 20265 min read
The short version
- Position size is arithmetic, not conviction: risk in dollars divided by stop distance times pip value.
- The stop and the size are one decision. Widening the stop without shrinking the size doubles the risk.
- A pip value borrowed from EUR/USD is the most common way to size gold and indices completely wrong.
The decision you make before entry
Most trading conversation is about entries. The number that decides how long you survive is set before the entry: how much of the account a single losing trade is allowed to take. Everything else, including the quality of the setup, only matters if you are still in the seat next month.
Position size is how that decision gets enforced. It is not a feeling about how good a trade looks. It is arithmetic that turns a chosen risk in percent and a stop distance into a lot size.
The arithmetic
Take the account balance, multiply by the risk you allow per trade, and you have the dollars at stake. Divide that by the stop distance in pips multiplied by the value of one pip at one lot, and you have the position size. On a hundred thousand dollar account risking one percent with a twenty pip stop on EUR/USD, the risk is a thousand dollars and the size is five lots.
Change any input and the size changes with it. A forty pip stop at the same risk halves the size, which is the step people skip when they widen a stop and keep the lot size they had planned. The stop and the size are one decision, not two.
Where it goes wrong
The most common error is carrying a pip value borrowed from EUR/USD onto an instrument that does not share it. Gold, indices and pairs quoted in another currency all carry different pip or point values, so the same lot size represents a completely different risk.
The second is sizing on the balance you started with rather than the one you have now. Risk expressed in percent shrinks as the balance falls, which is exactly the behaviour you want after a drawdown.
What sizing cannot do
Correct sizing does not turn a losing method into a profitable one, and it does not protect you from a gap through your stop, from correlated positions that are really one position, or from a rule you never read. It limits the damage of one ordinary loss, which is a smaller promise than it sounds and a more useful one.
Run your own numbers through the position size and pip value calculators before the session rather than during one. The point of settling the arithmetic in advance is that the trade never gets to argue with it.
Written by PropSpread Research. Figures referenced in this guide are indicative snapshots from connected feeds, not tradable quotes, and the arithmetic behind them is published in full in the methodology. Nothing here is financial advice.