Position sizing and risk per trade
The previous lesson explained why risk management matters. This lesson turns that idea into a practical calculation: how large a position can be for a chosen risk budget and stop-loss distance? You will also learn why the calculated loss is an estimate, not a guarantee, especially when trading leveraged CFDs.
1. Start with a risk budget
Position sizing means choosing how many units, lots, or contracts to trade. Risk per trade is the amount you plan to lose if your protective exit works as expected. These are different measures: a large position with a nearby stop can have the same planned monetary risk as a smaller position with a more distant stop.
A risk budget can be stated as a fixed cash amount or a percentage of account equity. Equity includes the account balance plus unrealised profits and losses. The calculation is: risk budget = account equity × selected risk percentage. No percentage is suitable for everyone. The appropriate limit depends on financial circumstances, tolerance for loss, and other open positions.
2. Connect size to stop distance
For an instrument quoted in pips, the basic formula is: position size in lots = risk budget ÷ (stop distance in pips × pip value per lot). First identify the entry price and the price at which the trade idea would no longer be valid. Their difference gives the stop distance. Position size then adjusts the monetary exposure to that distance.
With the same risk budget, doubling the stop distance halves the calculated position size. A tighter stop allows a larger calculated position, but it can also be reached by normal price fluctuations. A stop distance should not be changed simply to justify a preferred trade size. The basic formula also needs adjustment for applicable costs and the instrument’s volume increments.
3. Worked example: EURUSD
Consider a hypothetical USD account with equity of $5,000 and a selected risk budget of 1%. The budget is $5,000 × 0.01 = $50. Suppose a EURUSD trade has a stop distance of 25 pips. One standard lot is 100,000 units, and its EURUSD pip value is $10. A 25-pip movement therefore represents $250 per standard lot.
The calculated size is $50 ÷ (25 × $10) = 0.20 lots, or 20,000 EUR. At this size, each pip is worth $2, so 25 pips equals $50. This simplified example excludes trading costs and assumes execution at the intended stop price. To keep an all-in estimate within $50, include applicable costs before sizing and round down to an allowed volume increment.
4. Separate leverage from risk
Margin is the amount required to support a leveraged position; it is not the planned loss at the stop. Leverage lets a trader control a larger exposure with less margin, but it does not reduce the monetary effect of a price movement on that exposure. For a given position size, pip value remains unchanged when the leverage setting changes.
For example, ignoring costs and currency conversion, hypothetical exposure worth $20,000 would require $200 margin at 1:100 leverage or $100 at 1:200 leverage. The exposure remains $20,000 in both cases. Available margin is therefore not a substitute for a risk budget. CFDs are leveraged products and carry a high risk of loss; adverse price movements can also trigger automatic position closures under applicable margin rules.
5. Check the practical limits
Before placing an order in MT5, check the symbol’s contract specifications, including contract size, tick size, tick value, minimum volume, and volume step. Pip or tick values may need conversion into the account currency. Gold, indices, and forex should not be sized using an assumed universal pip value. For example, a 100-ounce gold contract has different price sensitivity from a standard forex lot.
Allow for spread, commissions, and any financing charges relevant to the holding period. Avoid counting spread twice if it is already reflected in the entry-to-stop calculation. A stop-loss order does not guarantee its execution price: gaps or slippage can make the actual loss larger. Finally, assess combined exposure across open trades, especially those affected by the same currency or market event. The next lesson connects this planned risk to potential reward.
- Set a monetary risk budget before calculating position size.
- Combine stop distance and pip or tick value to size exposure.
- Margin requirements and planned trade risk measure different things.
- Include costs and combined exposure; actual losses can exceed estimates.