Position size decides what a trade can cost you. The 1% rule, and the arithmetic that turns a stop-loss distance into a lot size.<\/p>\n
Risk management is not an attitude. It is a number you work out before opening a position: the amount this trade can take from your account if it goes wrong.<\/p>\n
Three things set that number, and you control all three:<\/p>\n
Multiply the stop distance by the pip value and you have the cost of being wrong.<\/p>\n
Notice what is absent: your opinion about where price is going, and leverage. A trader who is right more often than not, but sizes without a limit, can still empty an account.<\/p>\n
The 1% rule says no single trade should be able to cost you more than 1% of your account balance. On a $2,000 account that is $20. That is the maximum loss if the stop-loss is hit, decided before you place the order.<\/p>\n
It is a percentage rather than a fixed sum for a reason: the amount at stake moves with the account. If the balance falls to $1,800, the figure falls to $18 on its own, without you deciding anything while you are already down.<\/p>\n
Some traders use 0.5%, some 2%. The figure matters less than having one, writing it down, and not changing it because a trade feels more certain than the last. The trades that feel most certain are not a separate category with different arithmetic.<\/p>\n
One hard limit is worth knowing. The smallest position most retail accounts can open is 0.01 lots, so on a small balance with a wide stop, the size the rule calls for can be smaller than that minimum. Then the rule cannot be followed as written, and that should be a conscious decision rather than an accident.<\/p>\n
The formula:<\/p>\n
\nPosition size in lots = Risk in money \u00f7 (Stop distance in pips \u00d7 pip value per lot)<\/strong><\/p>\n<\/blockquote>\n
In six steps:<\/p>\n
\n
- Take your risk in money.<\/strong> Balance \u00d7 1%.<\/li>\n
- Decide where the stop-loss goes<\/strong> from the chart: below the level that would show a long was wrong, above it for a short.<\/li>\n
- Measure the stop distance in pips<\/strong> from your entry to that level.<\/li>\n
- Look up the pip value per lot<\/strong> for the instrument.<\/li>\n
- Divide.<\/strong> Risk in money \u00f7 (stop distance \u00d7 pip value per lot).<\/li>\n
- Round down<\/strong> to the nearest step your account allows, normally 0.01 lots. Always down: rounding up puts you over your own limit.<\/li>\n<\/ol>\n
Step 4 matters because a pip is worth a different amount on each instrument. Pips, lots and contract size<\/a> explains where these come from.<\/p>\n
\n\n
\n \nInstrument<\/th>\n One move of<\/th>\n 1.00 lot<\/th>\n 0.10 lot<\/th>\n 0.01 lot<\/th>\n<\/tr>\n<\/thead>\n \n EUR\/USD<\/td>\n 0.0001 (1 pip)<\/td>\n $10<\/td>\n $1<\/td>\n $0.10<\/td>\n<\/tr>\n \n GBP\/USD<\/td>\n 0.0001 (1 pip)<\/td>\n $10<\/td>\n $1<\/td>\n $0.10<\/td>\n<\/tr>\n \n XAU\/USD (gold)<\/td>\n $1.00 in the price<\/td>\n $100<\/td>\n $10<\/td>\n $1<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Index CFDs such as the US 500 are quoted in index points, and a point’s value depends on the contract size, so check the specification first.<\/p>\n
The order of the steps is what people get wrong. The stop goes where the chart says, then the size is calculated to fit it. Moving a stop closer so you can trade a bigger size does not reduce risk; it makes the position more likely to be closed.<\/p>\n
Worked example: sizing a trade on a $2,000 account<\/h2>\n
Your balance is $2,000, so under the 1% rule this trade may cost at most $20<\/strong>.<\/p>\n
You want to buy EUR\/USD. The ask is 1.0800, and the level that would show the idea has failed sits at 1.0770, so the stop-loss goes there.<\/p>\n
Step 1 \u2014 risk in money.<\/strong> $2,000 \u00d7 1% = $20<\/strong>.<\/p>\n
Steps 2 and 3 \u2014 stop distance.<\/strong> 1.0800 \u2212 1.0770 = 0.0030, or 30 pips<\/strong>.<\/p>\n
Step 4 \u2014 pip value.<\/strong> On EUR\/USD, one pip on 1.00 lot is $10<\/strong>.<\/p>\n
Step 5 \u2014 divide.<\/strong> A 30-pip stop on 1.00 lot costs 30 \u00d7 $10 = $300, so:<\/p>\n
$20 \u00f7 $300 = 0.0667 lots<\/strong><\/p>\n
Step 6 \u2014 round down.<\/strong> To the nearest 0.01, that is 0.06 lots<\/strong>.<\/p>\n
Check it.<\/strong> At 0.06 lots, one pip is worth $0.60, so a 30-pip stop costs 30 \u00d7 $0.60 = $18.00<\/strong>, inside your $20 limit. Rounding up to 0.07 lots puts a pip at $0.70 and the stop at $21.00, over it.<\/p>\n
Add the spread.<\/strong> A long is closed on the bid, so the real distance from your fill to your stop is 30 pips plus the spread. With a typical one-pip spread that is 31 pips, and being stopped out costs about $18.60<\/strong>. The balance would go from $2,000 to about $1,981.40, and 1% of that is about $19.81: the rule adjusts itself. A take-profit 60 pips the other way closes the same 0.06 lots at the same $0.60 per pip.<\/p>\n
If the stop belongs further away.<\/strong> Suppose the level is 1.0740 instead, a 60-pip stop. The risk budget is unchanged:<\/p>\n
$20 \u00f7 (60 \u00d7 $10) = 0.0333 lots \u2192 0.03 lots<\/strong><\/p>\n
A stop twice as wide gives a position roughly half the size, and the cost of being wrong stays near $20. The stop distance sets the size. The size never sets the stop.<\/p>\n
If the answer is smaller than 0.01 lots.<\/strong> Take that same 60-pip stop on a $200 account. Risk is $2, and $2 \u00f7 $600 = 0.0033 lots. The smallest size available is 0.01 lots, which on a 60-pip stop costs about $6: three times the intended risk, and 3% of that balance. The formula is telling you something real: for that stop distance, the account is too small to trade at 1%. The options are a closer stop if the chart supports one, an instrument with a smaller pip value, or no trade.<\/p>\n
Why margin and leverage are not the same as risk<\/h2>\n
This confusion is expensive.<\/p>\n
Margin<\/strong> is the deposit held while a position is open. Above, 0.06 lots of EUR\/USD is 6,000 units of the base currency, roughly $6,480 of exposure at 1.0800. At 1:30 leverage the margin held is about $216; at 1:100, about $64.80.<\/p>\n
Risk<\/strong> is what the trade can cost you: about $18.60.<\/p>\n
Higher leverage lowers the margin held, letting you open a larger position with the same deposit. It does not change what a pip is worth. Use the extra room to trade 0.60 lots instead of 0.06 and being stopped out at the same level costs about $186 instead of about $18.60. Leverage and margin explained<\/a> covers the mechanism.<\/p>\n
Leverage decides how much you can<\/em> open. Position sizing decides how much you should<\/em>.<\/p>\n
Where the stop-loss goes, and what it cannot do<\/h2>\n
A stop-loss turns the calculation into something real; without one, the number is a hope, not a limit.<\/p>\n
Place it at the price that would show the reason for the trade no longer holds: beyond a level, beyond a recent swing, beyond the point where the idea was valid. Placing it at whatever distance produces the size you wanted is the earlier error in disguise.<\/p>\n
One thing it does not do is fix your exit price. When triggered it becomes a market order, so if price gaps over a weekend or on a scheduled release, the position closes at the first available price, well past your level. The $18.60 above is the cost under normal conditions, not a ceiling. The stop and the size only work as a pair.<\/p>\n
Total risk when you hold more than one position<\/h2>\n
Sizing each trade at 1% is half the job. Five open positions at 1% each is 5% of the account exposed at once.<\/p>\n
It can be worse than it looks. Long EUR\/USD, long GBP\/USD and short USD\/CHF are three tickets but largely one bet against the US dollar. If the dollar strengthens sharply they move against you together, and the careful per-trade sizing measured the wrong thing. Count related positions as one exposure.<\/p>\n
Most people who use a per-trade limit also set a total one: a cap on how much of the account can be at risk at once. The figure is yours; having one is the point.<\/p>\n