Position Sizing: Turning Risk Per Trade Into a Number of Units
The sizing formula, worked examples across instruments, and the account-level limits that sit above it.
Position sizing converts a risk decision into a quantity. The formula is simple: the amount you are willing to lose divided by the amount you lose per unit if the idea is wrong.
Everything difficult about sizing is in defining those two numbers correctly and applying them without exception.
The formula
Size equals risk amount divided by risk per unit. Risk amount is your chosen percentage of account equity. Risk per unit is the distance from entry to invalidation, expressed in the instrument's value per unit of movement.
For a 10,000 account risking one percent, the risk amount is 100. If invalidation sits 50 points away and each point is worth 1 per unit, size is 2 units.
- Risk amount = equity × risk percentage
- Risk per unit = stop distance × value per point
- Size = risk amount ÷ risk per unit
Instrument conversions
Shares are the simplest case: risk per unit is the stop distance in currency. Currency pairs require pip value, which depends on lot size and the quote currency. Futures and CFDs require tick value per contract.
Build the conversion once per instrument in a spreadsheet, then the sizing step takes seconds and never depends on mood.
Limits above the trade
Per-trade sizing is not enough on its own. Total open risk, correlated exposure and a daily loss limit prevent five simultaneous one-percent trades from becoming a single five-percent bet on the same theme.
- Maximum open risk across all positions
- Correlation cap for related instruments
- Daily and weekly loss limits
Why the wide stop problem is a sizing problem
A structurally correct stop that sits far away does not mean you must take more risk. It means the position is smaller. Traders who keep size constant and move stops closer have inverted the process.