Lesson 01: Position Sizing From a Fixed Risk

Almost everything a trader controls runs through one calculation. Not the entry, not the indicator — the size. Get it from a fixed rule and a losing streak is an inconvenience; get it from how confident you feel and the streak is the end of the account.

Track 1 introduced this arithmetic in passing. Here it is properly, including what to do with a pair you have never traded.

Risk budget per trade

Decide, once, what a single losing trade costs you. Express it as a percentage of the balance, and recompute the money each time the balance changes.

Compounding down, so each loss is smaller than the last — the counts are approximate
Risk per trade	On $5,000	Losses to be down 20%
0.5%	$25	About 45
1%	$50	About 22
2%	$100	About 11
5%	$250	About 4

1% is the common default and a reasonable one. It is small enough that ten losses in a row is a bad month rather than a catastrophe, and large enough that a real edge shows up in a realistic number of trades. Lesson 6 replaces this rule of thumb with a number computed from your own statistics.

Note

Percent of balance, not percent of equity including open trades. Sizing off equity that already contains unrealised profit means adding risk fastest at exactly the moment you are most exposed.

Stop distance in pips

The second input is the distance from entry to the price that proves the idea wrong. It comes from the chart, not from the size you wish you could trade — the next lesson is entirely about where that level sits.

For now, the only thing that matters is the order of operations. The stop is decided first and the size follows from it. Reversing those two is the single most common sizing mistake, because it quietly converts "I want a bigger position" into "I will accept being wrong sooner".

Caution

A stop placed where the loss feels tolerable rather than where the idea fails is not a risk decision. It is a guarantee of being stopped out by noise and then watching the trade work without you.

Pip value on this pair

The third input converts pips into money, and it is the one that changes between instruments.

For a pair quoted in dollars — EUR/USD, GBP/USD, AUD/USD — one pip on one standard lot is $10, always. For a pair quoted in something else, it depends on the exchange rate. On USD/JPY at 150, one pip on one lot is $6.67.

Lots = risk in money / (stop in pips x pip value per lot)

What each variable means:

risk in money — Your percentage applied to the current balance
stop in pips — Entry to invalidation, measured on the chart
pip value per lot — $10 on a USD-quoted major; otherwise look it up

Three worked examples

Account	Risk	Stop	Pair	Size	Actual risk
$5,000	1% = $50	25 pips	EUR/USD	0.20 lots	$50.00
$5,000	1% = $50	60 pips	GBP/USD	0.08 lots	$48.00
$5,000	1% = $50	30 pips	USD/JPY at 150	0.25 lots	$50.00

Notice the second row. Nothing about the account or the risk budget changed — a wider stop simply bought a smaller position. That is the mechanism working: the money at risk stays put while the size absorbs the difference.

The third row is the answer to "a pair I have never traded". You do not need to know anything about USD/JPY except its pip value. The method does not change; only one input does.

Try it now

The lot size calculator does all three steps at once. The pip calculator is for the middle one on its own, which is what you need when the pair is not quoted in dollars.

Lot Size Calculator Pip Calculator

Rounding down, and why

The formula rarely returns a tradeable size. Brokers deal in steps of 0.01 lots, so 0.0285 has to become either 0.02 or 0.03.

It becomes 0.02. Always down, never up.

Rounding up breaks the budget. On a $1,000 account risking 1% over a 35-pip stop, 0.03 lots risks $10.50 against a $10 limit. The rule you set is now a rule you do not follow.
Rounding down is a rounding error in the safe direction. 0.02 lots risks $7.00 — under target, which costs a little expectancy and nothing else.
Small accounts round hardest. At 0.02 versus 0.03 the difference is 50%, so on a small balance the habit of rounding up is not a rounding error at all; it is a systematic 20% to 50% overshoot on every trade.

Good to know

If rounding down leaves you below the broker's minimum size, the honest conclusion is that the trade is too large for the account, not that the rule should bend. A cent account — Track 1, lesson 6 — is the usual way out.

One more discipline worth adopting now: recompute the risk in money from the current balance, not the one you started with. After a 20% drawdown, 1% is $40 rather than $50, and sizing off the old figure is how a drawdown accelerates into something worse.

Key takeaways

Size is an output of three inputs: risk in money, stop distance in pips, and pip value on that pair.
Decide the stop first. A position sized before the stop has converted a risk decision into a wish.
A wider stop buys a smaller position — the money at risk stays fixed, which is the entire point.
Always round down to the broker's step, and always recompute from the current balance.

Position Sizing From a Fixed Risk

By the end of this lesson