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The Position Sizing Formula, and How to Use It on Every Trade
Two traders take the same setup with the same 50 pip stop. One risks a measured slice of the account and shrugs off the loss when it comes. The other eyeballs a "round" size, gets stopped, and watches 8% of the account vanish on a single trade that was supposed to be ordinary. Same idea, same stop, completely different outcome. The difference is position sizing, and it is the one piece of risk management you can reduce to a formula and apply mechanically before every trade.
The good news is that the formula is simple arithmetic. The discipline is in using it every time, and in checking afterwards that the planned risk was the risk you actually took.
In short: do not pick the lot size and discover the risk later. Do the opposite: fix how much you are willing to lose (usually 1% of the account) and the size follows from that number, with Risk divided by (stop distance times the value of each unit). That way the maximum loss is decided before you click. Real risk, though, can exceed the plan when you move the stop or add to a loser: only a journal that compares planned against real shows you that.
Start from risk, not from size
The mistake almost every beginner makes is to pick the lot size first and discover the risk afterwards. Professionals work the other way round. You decide how much you are willing to lose if the trade is wrong, and the size follows from that decision. The near universal anchor for "how much you are willing to lose" is the 1% rule: do not risk more than 1% of the account on a single trade. Conservative traders use 0.5%, more aggressive ones go to 2%, but the principle is the same. A small, fixed fraction ensures that no single loss, and no short losing stretch, can do real damage.
Once the risk in currency is fixed, only two more numbers matter: how far away your stop is and how much each unit of distance costs you. Divide the first by the second and you have your size. Everything else is entering the right units.
The formula, worked on a real trade
Take a $10,000 account and the 1% rule, so the most you will risk is $100. You spot a setup on EUR/USD with a 50 pip stop. On a standard lot each pip is worth about $10, so the three numbers you need are already there.
Risk ÷ (stop distance × unit value) = position size The three inputs that decide the size, before you ever click buy
$100 of risk, divided by a 50 pip stop at $10 per pip, gives $100 / $500 = 0.2 lots. Change any input and the size adjusts to keep the risk exactly at 1%. The same logic works on any market; only the units change. On stocks there are no pips, so your risk per share is simply the dollar distance between your entry and your stop.
One formula, two markets
Here is the forex example and a stock one side by side: it is one formula in two costumes.
