Working out position size
Two readers open the same EUR/USD trade near 1.0850 with the same stop 25 pips away. One risks KSh 2,600 and the other risks KSh 13,000. The first survives a losing week. The second loses a fifth of the account on one trade. The difference is not the chart. It is the position size.
Compare two ways of arriving at a lot size
Two readers both expect EUR/USD to fall from around 1.0850. The first writes down the money at risk, the stop distance and the pip value, then divides. The second opens the platform, sees 0.50 lots in the size box, and clicks buy. Both end up in the market, but only one of them chose the size on purpose.
The first reader's order is smaller than the second's, and that is the point. A smaller size is not a weaker opinion about the chart. It is the same opinion expressed with a known cost if the stop is hit. The second reader has no number for that cost until the position is already open.
Nothing about the chart differs between them. Same pair, same entry area, same stop distance. The only difference is the order in which the three numbers were used. That order is the whole lesson, and it costs nothing to follow.
Take the three numbers in a fixed order
Start with the money. It comes from your plan, not from the chart, and it is a figure you decide before you look at any setup. Many people use a fixed percentage of the account, such as 1 or 2 per cent, but the percentage itself is a choice and not a rule that suits everyone.
Next, measure the stop distance in pips. The chart decides this, because the stop belongs where the idea is proved wrong, not where the arithmetic becomes convenient. If that distance is wide, the position will be small. If it is narrow, the position can be larger for the same money at risk.
Last, divide. Risk in shillings divided by stop distance in pips gives the risk per pip. That result divided by the pip value of one standard lot gives the size in lots. Three numbers in, one number out, and no step in the sequence depends on how confident you feel.
Handle the awkward answers
The calculation often returns a size that the platform will not accept. Brokers set minimum and step sizes, and these differ between brokers, so a figure such as 0.03 lots may not be available. The honest response is to skip the trade or accept a smaller risk than planned. Rounding the size up breaks the first number in the sequence, which was the only one protecting the account.
The pip value is also not fixed. It moves with the exchange rate, and the rate at the moment you close the trade is not the rate you used when you opened it, so the final figure will differ slightly from your estimate. Treat the calculation as close, not exact.
Costs sit on top of the risk you calculated. Some brokers charge a spread, some charge commission, and some build the cost into the price, and this varies between brokers. Those costs are not part of the stop distance, so add them to your thinking rather than to the division.
Working out 0.08 lots from three numbers
| Step | Amount | Note |
|---|---|---|
| Risk in money | KSh 2,600 | The amount you accept losing if the stop is hit. Here it is 2 per cent of a KSh 130,000 account. |
| Stop distance | 25 pips | The distance from entry at 1.0850 to the stop. One pip is 0.0001 on EUR/USD. |
| Pip value on one standard lot | KSh 1,300 | One pip on one standard lot is 10 units of the quote currency, converted at the current rate. At about KSh 130 to the unit, 10 units is KSh 1,300. |
| Risk per pip | KSh 104 | Risk in money divided by stop distance: KSh 2,600 divided by 25 pips. |
| Position size | 0.08 lots | Risk per pip divided by pip value: KSh 104 divided by KSh 1,300. That is 0.08 of a standard lot. |
Brokers round position sizes, and the pip value changes with the exchange rate. Some brokers also charge a spread or commission on top, and that varies between brokers.
Doing it once, step by step
You will work through one position size from start to finish, using the same three numbers in the same order each time. Read the steps once, then repeat them on paper with your own figures before you place anything.
- 01
Write down the money at risk
Decide the amount in shillings you are willing to lose if the stop is hit, and write it on paper. If you use a percentage, convert it to shillings first, because the division needs a plain amount. For example, 2 per cent of KSh 65,000 is KSh 1,300.
- 02
Measure the stop distance in pips
Place the stop where the trade idea fails, then count the pips between entry and stop. On EUR/USD near 1.0850, a move from 1.0850 to 1.0825 is 25 pips. Write that number beside the money figure.
- 03
Find the pip value for one standard lot
Ask your broker, or check the contract specification, for the value of one pip on one standard lot of EUR/USD in shillings. The figure varies between brokers and moves with the exchange rate. Write it down as a third number.
- 04
Divide risk by stop distance
Divide the money at risk by the stop distance in pips. KSh 5,200 divided by 40 pips is KSh 130 per pip. This is the cost of one pip on the position you are about to size, not on a standard lot.
- 05
Divide again to get the size
Divide the risk per pip by the pip value of one standard lot. KSh 130 divided by KSh 1,300 is 0.10 lots. That is the answer, and it is the last number you calculate.
- 06
Check the answer against the platform
Compare the result with the minimum and step size your broker allows. If 0.10 lots is not available, adjust downwards or skip the trade rather than rounding up. Confirm the figure on the order ticket before you send it.
The mistake most people make here
The common mistake is to pick a lot size first, because 0.10 or 1.00 looks like a normal number, and then place the stop wherever the chart allows. That reverses the order. The stop distance is set by the chart, the risk in money is set by your plan, and the lot size is the answer you calculate last. If the answer comes out smaller than the broker's minimum, the honest choice is to skip the trade or widen nothing and accept a smaller risk, not to round the size up and hope.Check yourself
You will risk KSh 5,200 with a stop 40 pips away. One pip on one standard lot is KSh 1,300. What is the position size?
Risk per pip is KSh 5,200 divided by 40, which is KSh 130. Position size is KSh 130 divided by KSh 1,300, which is 0.10 lots.
You open 0.20 lots with a stop 30 pips away. One pip on one standard lot is KSh 1,300. How much money is at risk?
Pip value on 0.20 lots is 0.20 times KSh 1,300, which is KSh 260. Risk is KSh 260 times 30 pips, which is KSh 7,800.
Your account holds KSh 65,000 and you want to risk 2 per cent. How much is that in shillings?
2 per cent of KSh 65,000 is KSh 1,300.
Questions that come up next
What is a pip on EUR/USD?
A pip is the smallest standard move in the price of a currency pair. On EUR/USD, one pip is 0.0001 of the price, so a move from 1.0850 to 1.0851 is one pip. The stop distance in the calculation is always measured in these pips.
How do I find the pip value for one standard lot?
The pip value depends on the pair and the exchange rate to your account currency. For EUR/USD with an account in shillings, the value of one pip on one standard lot is around KSh 1,300 at current rates, but it changes as the rate moves. Your broker's platform usually shows the exact figure for the pair you are trading.
Can I use this calculation on a different pair or a smaller account?
Yes. The three numbers are the same for any pair and any account size. The only thing that changes is the pip value, because each pair has its own pip size and its own conversion to shillings. Once you have the correct pip value, the division works the same way.
What if the calculated size is smaller than my broker allows?
Brokers set a minimum lot size, and it varies between brokers. If your answer is below that minimum, you cannot open the trade at the risk you planned. The sensible choices are to skip the trade or to accept a smaller risk than you intended, not to round the size up and take more risk than your plan allows.
Does the spread or commission change the position size?
The spread and any commission are costs that come out of your account on top of the risk you calculated. They do not change the formula, but they do mean your real loss if the stop is hit will be slightly larger than the number you used. Some brokers charge these costs and some do not, so the effect varies between brokers.
How often should I recalculate the pip value?
The pip value in shillings moves with the exchange rate, so it is not a fixed number you can set once. For a rough plan, the figure you used last week is close enough, but for an exact risk you should check the current pip value just before you open the trade. Small changes in the rate lead to small changes in the final position size.
The words used on this page
- Pip
- The smallest standard price move for a currency pair. On EUR/USD it is 0.0001, so a change from 1.0850 to 1.0851 is one pip.
- Standard lot
- A fixed trade size used as the reference for pip values. One standard lot of EUR/USD has a pip value of about KSh 1,300 at current rates.
- Stop distance
- The number of pips between your entry price and your stop loss. It is set by the chart, not by the size you want to trade.
- Risk per pip
- The money you are willing to lose for each pip the price moves against you. It is your total risk in shillings divided by the stop distance in pips.
- Position size
- The number of lots you open. It is calculated from your risk, your stop distance and the pip value, not chosen in advance.
What to take away
- Position size is the answer to a sum, not a number you pick because it looks normal.
- Use the three numbers in order: risk in shillings, stop distance in pips, pip value per standard lot.
- If the answer is below the broker's minimum, skip the trade or risk less, never round up.
- The pip value moves with the exchange rate, so recalculate it when the rate changes.