What is position sizing — how to calculate the right lot size

The risk budget is the cash a trade may lose if the stop fills at its price. It equals the account equity (the balance, when no other position is open) times the chosen risk percentage: $5,000 × 1% = $50. That 1% is this article's example input, not a recommended level; the percentage decides how deep a run of loss-making trades cuts into the account, and no single figure fits every account.

Stop distance is measured in pips from the entry fill price to the stop price. A long EUR/USD position entered at 1.1253 with its stop at 1.1233 has a 20-pip stop, since one pip on EUR/USD is 0.0001.

Pip value per lot turns that distance into cash. On EUR/USD in a USD account, one pip on 1 standard lot (100,000 euros) is worth 0.0001 × 100,000 = $10.

Commission is charged on volume, not on distance, so it adds a fixed amount per lot to the loss at the stop. The examples here use $7.00 per round turn per standard lot ($3.50 at entry and $3.50 at exit), an illustrative assumption rather than a market figure: each broker sets its own commission schedule, and spread-only accounts charge none.

A broker's volume grid decides which sizes exist: a minimum volume, a step and a maximum. This article's defaults are a 0.01-lot minimum, a 0.01-lot step and a 100-lot maximum. Each symbol's contract specification on the trading platform states the broker's own values.

Loss per lot at the stop is the pip cost over the stop distance plus the round-turn commission. Dividing the risk budget by that loss gives the raw lot size:

Every figure after the rounding comes from the rounded lot, not from the raw 0.2415. The pip cost at the stop is 0.24 × $10 × 20 = $48.00 and the commission is 0.24 × $7 = $1.68, which together make $49.68, $0.32 inside the budget.

Leaving commission out of the formula can oversize the trade. Without it the raw size is $50 ÷ (20 × $10) = 0.25 lots, and 0.25 lots lose 0.25 × $207 = $51.75 at the stop once the commission is charged: $1.75 over the budget.

The error grows as the stop tightens, because commission stays fixed per lot while the pip cost shrinks with distance. At a 5-pip stop the $7 is 12.3% of a $57 loss per lot, against 3.4% of $207 at 20 pips.

The lot size is the largest volume on the grid whose loss at the stop, commission included, stays within the budget. In practice that means flooring the raw size to the step: floor(raw lots ÷ step) × step.

Rounding to the nearest step would break the budget whenever the raw size ends in the upper half of a step. On an 18-pip stop the loss per lot is $10 × 18 + $7 = $187 and the raw size is $50 ÷ $187 = 0.2674 lots. Nearest-step rounding gives 0.27 lots and a $50.49 loss at the stop; rounding down gives 0.26 lots and $48.62.

A finer step leaves less of the budget unused. On a grid with a 0.001-lot minimum and step, the 20-pip example sizes at floor(0.2415 ÷ 0.001) × 0.001 = 0.241 lots, and the loss at the stop is 0.241 × $207 = $49.89, against $49.68 at 0.24 lots.

When the minimum volume is too large

Rounding down can land below the broker's minimum. A $200 account at the same 1% has a $2 budget, and on the 20-pip stop the raw size is $2 ÷ $207 = 0.0097 lots, under the 0.01-lot minimum. The minimum itself would lose 0.01 × $207 = $2.07 at the stop, $0.07 over the budget, so the calculation reports that the minimum volume is too large instead of rounding up to it.

Changing one input makes the trade fit the $2 budget. A stop of 19 pips or less brings the minimum's loss to $1.97 or below (0.01 × ($10 × 19 + $7)), and a grid with a 0.001-lot minimum sizes it at 0.009 lots with a $1.86 loss at the stop.

The maximum caps the other end of the grid. A budget whose raw size exceeds 100 lots sizes at 100 lots under the default grid, and the loss at the stop is recomputed for that volume.

The formula needs the pip value in the account's own currency, and that value depends on where the account currency sits in the pair. Three cases cover every forex pair, the same three the pip value calculator uses, and the base and quote currency of the pair decides which one applies.

USD/JPY shows why the pip value has to be calculated rather than assumed. With the same $50 budget, 20-pip stop and $7 commission at 158.02, the loss per lot is $6.3283 × 20 + $7 = $133.57. The raw size is $50 ÷ $133.57 = 0.3743 lots, which rounds down to 0.37 lots, and the loss at the stop is 0.37 × $133.57 = $49.42.

EUR/GBP adds one conversion. A pip there is worth £10 per lot, or $13.335 at GBP/USD 1.3335, so the loss per lot is $13.335 × 20 + $7 = $273.70 and the raw size is $50 ÷ $273.70 = 0.1827 lots: 0.18 lots, losing $49.27 at the stop.

One $50 budget on one 20-pip stop therefore permits 0.37 lots of USD/JPY, 0.24 lots of EUR/USD and 0.18 lots of EUR/GBP. The pip value per lot in the account currency sets the size, together with the commission; on USD/JPY that pip value moves with the pair's price, and on a cross with the conversion rate.

Stop distance and lot size move inversely when the budget is fixed. The rows below hold the $50 budget and the $7 commission and set the stop against an illustrative daily 14-period EUR/USD average true range of 70 pips, an assumed figure for the example and not a measurement.

The 140-pip row uses only 84% of the budget. One more step, 0.04 lots, would lose 0.04 × $1,407 = $56.28, so on wide stops a single 0.01-lot step is a large share of the position and rounding down leaves more of the budget unspent.

Changing the risk percentage scales the budget, and the size follows in proportion before rounding. On the $5,000 account and the 20-pip stop:

None of these percentages is a recommended setting. What differs between them is the drawdown a losing streak produces: ten consecutive losses at the stop, each sized on the current balance, take at most 9.6% of the account at 1% (1 − 0.99¹⁰) and at most 18.3% at 2% (1 − 0.98¹⁰), the figures if each loss equals the full budget.

On a pair whose base currency is the account currency, the loss builds up in the quote currency and converts at the rate that applies when the position closes. A long USD/JPY position on a USD account loses yen as the price falls, and those yen convert back to dollars at the lower exit price, where each yen buys more dollars.

Converting at the exit gives a long the larger dollar loss, $4.03 more over 100 pips, because the stop sits below the entry. A short has its stop above the entry, so for a short the exit conversion gives the smaller figure.

Over the 20-pip stop from the earlier USD/JPY example the difference is small. At the stop price of 157.82 the pip value is ¥1,000 ÷ 157.82 = $6.3363 per lot, the loss per lot becomes $6.3363 × 20 + $7 = $133.73, and 0.37 lots lose $49.48 at the stop instead of $49.42. The size stays at 0.37 lots, since 0.38 lots would lose $50.82. The position size calculator offers both conversions wherever the pair's own price converts the loss, which also covers USD/JPY on a EUR account; where the conversion uses only other pairs' rates, as for EUR/GBP on a USD account, it converts at the fixed reference rates.

A position that fits the risk budget still has to fit the account's margin. Required margin is notional value ÷ leverage: 0.24 lots of EUR/USD is 24,000 euros, or $27,007.20 at 1.1253, which holds $270.07 of margin at 1:100 and $54.01 at 1:500. On the $5,000 account either figure leaves most of the equity free.

Leverage does not change the loss at the stop. The 0.24 lots lose $49.68 at the stop at either ratio; leverage changes the margin held, and with it how far price can move before the broker's stop-out closes the position. Maximum leverage and the stop-out level are both set by the broker and differ between brokers and account types.

The stop is the exit only if the stop-out does not arrive first. Brokers close positions when the margin level (equity ÷ used margin × 100) falls to their stop-out level, commonly somewhere between 20% and 50%. For a single position, the loss that reaches the stop-out is the account equity minus the stop-out level times the margin. With a 50% stop-out assumed for the 0.24-lot example, that loss is $5,000 − (50% × $270.07), more than $4,800, so the $49.68 stop comes long before it.

The check binds when the budget is large next to the account. A $1,000 account with a $600 budget on a 25-pip EUR/USD stop sizes at 2.33 lots ($600 ÷ $257 per lot = 2.3346). At 1:100 the margin is 233,000 × 1.1253 ÷ 100 = $2,621.95, more than the account holds, so the order cannot open; the largest volume the account can margin at 1:100 is 0.88 lots ($1,000 ÷ $1,125.30 per lot = 0.8887).

With 1:300 leverage the margin is $873.98 and the order opens. A 50% stop-out, assumed here as the broker's setting, is reached when equity falls to $436.99, after a loss of $1,000 − $436.99 = $563.01. That is less than the $598.81 the 2.33 lots lose at the stop (2.33 × $257, commission included). Counting the full $16.31 round-turn commission against equity from the open, as on accounts that charge it at entry, the position loses $23.30 a pip at either leverage, so the stop-out arrives after ($563.01 − $16.31) ÷ $23.30 = 23.5 pips, ahead of the 25-pip stop: the broker, not the stop, closes the trade.

A stop-loss order triggers at its price and then fills at the next available price, which can be worse. Slippage in a fast market, such as the seconds around a data release, and a price gap over a weekend can both move the fill past the stop.

Five pips of slippage add 0.24 × 5 × $10 = $12.00 to the planned $49.68 and put the loss $11.68 over the $50 budget, 23.4% above it. Position sizing limits the loss at the stop price, not the loss on the fill. Every other loss figure in this article, and in the calculator, assumes the stop fills at its price; the calculator's late-fill line shows the cost of a worse fill.