The formula is simple: risk amount divided by stop distance divided by the value of one unit of that distance. What makes it powerful is that it removes size from the realm of feeling. Wider stop, smaller position; tighter stop, larger one - with the money at risk unchanged.
Accounts rarely die from bad entries. They die from one oversized trade, which is why sizing is the single highest-leverage habit available to a beginner.
The mistake it causes: deciding size from conviction. Conviction is highest exactly when you are about to be wrong.
The formula, and why it is the whole job
Lots or units = (balance × risk %) ÷ (stop distance × value per unit of distance)
A $1,000 account risking 1% with a 20-pip stop on EUR/USD, where a pip is $10 per standard lot, can trade 0.05 lots. Widen the stop to 50 pips and the position falls to 0.02 lots. The money at risk never moves. That is the mechanism: the stop sets the size, and the size never sets the risk.
| Balance | Risk | Stop | Position | Loss if stopped |
|---|
| $500 | 1% | 20 pips | 0.02 lots | $5 |
| $1,000 | 1% | 20 pips | 0.05 lots | $10 |
| $1,000 | 1% | 50 pips | 0.02 lots | $10 |
| $10,000 | 1% | 30 pips | 0.33 lots | $100 |
Why one percent
Not caution, arithmetic. At 1%, eight consecutive losses cost about 8% and are fully recoverable. At 5% the same ordinary streak takes a third of the account and changes how you trade for months afterwards. With a 45% win rate, eight losses in a row arrive roughly once every four hundred trades, which is one normal year. Any size that cannot survive that is a countdown rather than a plan.
Round down, always
Rounding 0.047 lots up to 0.05 adds about 6% to the risk you chose. Doing that on every trade produces a risk setting you never decided on. Rounding down costs a fraction of the upside and keeps the number honest.
What sizing does not fix
It will not make a negative-expectancy system profitable; it only controls how long you survive while finding out. Pair it with the risk and reward planner to check the system is worth running, and the position size calculator to execute it on every single entry without exception.
