How do you calculate position size and risk in forex?

How to spot it

Every other concept on this site is about reading a chart. This one is about surviving being wrong, which will happen often whatever you read. The method is the same for every trade: the chart sets the stop, the stop sets the size. Never the other way round.

Three quantities go in. The risk amount is the account balance multiplied by the percentage you are prepared to lose on one trade. The stop distance is the gap between entry and stop in pips, where one pip is 0.0001 on most pairs and 0.01 on pairs quoted in Japanese yen. The pip value is what one pip is worth for one unit of the pair, in your account currency.

Pip value starts in the quote currency, the second currency in the pair. One unit moves by one pip size, so a standard lot of 100,000 units is worth 10 units of the quote currency per pip, or 1,000 yen on a yen pair. A mini lot is 10,000 units and a micro lot is 1,000. If the quote currency is not your account currency, convert it at the current exchange rate. The basics of pips and lots are taught as games on Forex Fitness, our forex basics site.

Margin and leverage are a separate matter. Margin is the deposit needed to hold the position: the notional value divided by the leverage. Leverage does not change what a pip is worth or how much you lose at the stop. It only changes how large a position the account is able to carry, which is exactly why high leverage makes it easy to take a size far bigger than this formula would allow.

Step by step

1. Set the risk for the trade as a percentage of the account and turn it into money.
2. Take the stop from the chart, for example beyond the swing or the sweep, and measure entry to stop in pips.
3. Find the pip value of one unit: the pip size in the quote currency, converted to your account currency if they differ.
4. Divide the risk amount by the stop distance times the pip value per unit. The result is the number of units.
5. Convert units to lots, round down to a size your platform accepts, and check that the loss at the stop is at or under the risk amount.

The numbers to remember

• One pip: 0.0001 on most pairs, 0.01 on JPY pairs.
• Lots: standard 100,000 units, mini 10,000 units, micro 1,000 units.
• Pip value per standard lot: 10 units of the quote currency, or 1,000 yen on JPY pairs. Per mini lot it is 1 unit of the quote currency, per micro lot 0.10.
• Risk amount: account balance x risk percentage.
• Units: risk amount / (stop in pips x pip value per unit).
• Margin: notional value / leverage. It limits the size you can hold. It is not the amount at risk.

Why small size matters: losing streaks

Take a purely hypothetical method that wins half of its trades. The chance that six particular trades in a row all lose is 0.5 multiplied by itself six times, about 1.6%. That sounds rare, but over a hundred trades there are many places for such a run to start, and a run of six or more losses somewhere in those hundred trades is about as likely as not.

Now look at what the same streak does at different sizes. Six losses in a row at 1% of the account each leave about 94% of the balance, a drawdown near 6%. At 5% each they leave about 74%, a drawdown near 26%. At 10% each they leave about 53%, close to half the account gone, from an ordinary run of bad luck in a method that was not broken.

This is the lesson of the Reality Lab game: 200 simulated traders use an identical model with identical odds, and their results spread out widely from variance alone. Size is the only part of that picture a trader controls, and it decides whether a normal losing streak is survivable.

Worked example

Example 1: a USD account trading EUR/USD. The account holds 10,000 US dollars and the risk per trade is 1%, so the risk amount is 100 dollars. The chart puts the stop 25 pips from the entry. The quote currency is the US dollar, the same as the account, so no conversion is needed: one unit is worth 0.0001 dollars per pip.

Units = 100 / (25 x 0.0001) = 100 / 0.0025 = 40,000 units. That is 0.40 of a standard lot, or 4 mini lots. Check it the other way: 40,000 units are worth 4 dollars per pip, and 25 pips x 4 dollars = 100 dollars. The loss at the stop equals the risk amount.

Example 2: the same account trading USD/JPY. The risk amount is again 100 dollars and the stop is 30 pips. The quote currency is now the yen, so the pip value must be converted. Assume, purely for illustration, an exchange rate of 150 yen per dollar. This is an assumed round number, not a market price. One unit is worth 0.01 yen per pip, which is 0.01 / 150 dollars.

A 30 pip stop on one unit is 30 x 0.01 = 0.30 yen, and 0.30 / 150 = 0.002 dollars. Units = 100 / 0.002 = 50,000 units, or 0.50 of a standard lot. Check: 50,000 units are worth 500 yen per pip, 30 pips is 15,000 yen, and 15,000 / 150 = 100 dollars.

Example 3: a CAD account trading EUR/USD. The account holds 10,000 Canadian dollars, the risk is 1% or 100 Canadian dollars, and the stop is 25 pips. The pip value is in US dollars and has to be converted. Assume, again only as an illustration, 1.40 Canadian dollars per US dollar. One unit is worth 0.0001 US dollars per pip, which is 0.00014 Canadian dollars. Units = 100 / (25 x 0.00014) = 100 / 0.0035 = about 28,571 units. Round down to 28,000 units, 0.28 of a standard lot. Check: 28,000 x 0.00014 = 3.92 Canadian dollars per pip, and 25 pips x 3.92 = 98 Canadian dollars, just under the risk amount.

Margin for Example 1, to show how separate it is: the position is 40,000 euros of notional value. At leverage of 30 to 1 the margin is 40,000 / 30, about 1,333 euros, converted to dollars at the current rate. At 100 to 1 it is 400 euros. The amount at risk is 100 dollars in both cases, because the stop and the size did not change.

Takeaway: The stop distance comes from the chart, the risk amount comes from the account, and the position size is whatever number makes the two agree.

Common mistakes

• Choosing the lot size first. Trading "one lot" on every setup means a 10 pip stop and a 60 pip stop risk very different amounts. The size must be recalculated from the stop on every trade.
• Moving the stop to fit the size. Tightening a stop so that a bigger position fits the risk amount puts the stop where the chart does not justify it. Keep the stop, reduce the size.
• Forgetting the currency conversion. On a pair whose quote currency is not your account currency, a pip is not worth what it is on EUR/USD. Skipping the conversion on yen pairs or in a CAD account can put the real risk well away from the intended one.
• Treating margin as the risk. The margin a platform asks for is a deposit, not a limit on the loss. A position can lose far more than its margin if the stop is far away or the market gaps through it.
• Raising size after losses. Increasing risk to win back a drawdown turns a normal losing streak into a serious one. The risk percentage is set in advance and does not grow because the last trade lost.