The position sizing formula

The formula every trader needs to know

Position size is the amount you trade per setup. The formula looks like this: size equals account balance times risk percent, divided by stop distance times pip value. In plain English: figure out the dollars you are willing to lose, then size the trade so the stop exactly equals that loss.

Let us walk through each piece. Account balance is just your current equity. Risk percent is the share you are willing to lose on this single trade, usually 0.5 to 1 percent. Stop distance is how far the stop sits from your entry, measured in pips for forex, ticks for futures, or cents for stocks. Pip value is how much one pip is worth at your trade size. On a micro lot of EUR/USD, one pip is about ten cents.

Put it together with a $500 account. You decide to risk 1 percent. Risk dollars are $500 times 0.01, which equals $5. Now suppose EUR/USD needs a 10-pip stop based on structure. Each pip on a micro lot is $0.10, so a 10-pip stop costs $1 per micro. Divide your $5 risk by that $1 cost per micro. You can hold 5 micro lots, or 5,000 units of EUR/USD.

If the stop has to be wider, the size has to be smaller. A 20-pip stop on the same setup means each micro costs $2. Five dollars divided by two dollars is 2.5 micros. Some brokers round down to whole micros, so you trade 2 micros. The risk dollars never change. Stop and size flex around them.

Recap: risk dollars on top, stop times pip value on the bottom. Decide what you can lose, then size the trade so the stop matches exactly.