Position Sizing Step-by-Step: Calculating Lot Size From Stop-Loss and Risk

Position sizing as a pre-trade decision

Position sizing answers one question: How many lots can I trade so that, if my stop-loss is hit, I lose only the amount I planned? You calculate it before entering the trade, using your account equity, your chosen risk percentage, and your stop distance. Once the trade is on, you do not increase size to “make back” losses—doing so breaks the math and typically increases drawdowns.

The repeatable formula (use this every time)

Use this two-step method:

• Dollar Risk = Account Equity × Risk%
• Lot Size = Dollar Risk ÷ (Stop in Pips × Pip Value per Lot)

Where:

• Account Equity is your current equity (not your starting balance).
• Risk% is the fraction of equity you are willing to lose if stopped out (e.g., 1% = 0.01).
• Stop in Pips is the distance from entry to stop-loss in pips.
• Pip Value per Lot is the money value of 1 pip for one lot of that pair in your account currency. (Your broker/platform usually shows this; it can vary by pair and exchange rate.)

Workflow checklist (do it in this order)

1. Decide risk% for the trade (example: 0.5%, 1%).

2. Measure stop distance in pips from your planned entry to your stop-loss.

   Continue in our app.

   You can listen to the audiobook with the screen off, receive a free certificate for this course, and also have access to 5,000 other free online courses.

   Or continue reading below...

   

   Download the app

3. Get pip value per lot for that pair (per 1.00 lot) in your account currency.

4. Compute Dollar Risk and then Lot Size using the formula.

5. Round down to the nearest tradable lot increment (and re-check the maximum loss).

Worked examples (different pairs, different stops)

Example 1: EUR/USD, moderate stop

Assumptions (USD account):

• Account Equity = $10,000
• Risk% = 1% (0.01)
• Stop = 25 pips
• Pip Value per 1.00 lot (EUR/USD) ≈ $10 per pip

Step 1: Dollar Risk

$10,000 × 0.01 = $100

Step 2: Lot Size

Lot Size = $100 ÷ (25 × $10) = $100 ÷ $250 = 0.40 lots

Verification (max loss at stop)

25 pips × $10/pip × 0.40 = $100

Example 2: GBP/USD, wider stop (same risk)

Assumptions (USD account):

• Account Equity = $10,000
• Risk% = 1%
• Stop = 60 pips
• Pip Value per 1.00 lot (GBP/USD) ≈ $10 per pip

Dollar Risk

$10,000 × 0.01 = $100

Lot Size

Lot Size = $100 ÷ (60 × $10) = $100 ÷ $600 = 0.1667 lots

Rounding note: if your broker allows 0.01 increments, you could trade 0.16 lots (round down). If only 0.10 increments, you’d trade 0.10 lots.

Verification

• At 0.16 lots: 60 × $10 × 0.16 = $96
• At 0.10 lots: 60 × $10 × 0.10 = $60

Notice how a wider stop forces a smaller size to keep risk controlled.

Example 3: USD/JPY (JPY pair to reinforce pip convention)

JPY pairs typically quote pips to the second decimal place (e.g., 145.20 to 145.21 is 1 pip). Your platform may show an extra digit (a pipette), but your stop should be converted into pips for the formula.

Assumptions (USD account):

• Account Equity = $5,000
• Risk% = 0.5% (0.005)
• Stop = 35 pips
• Pip Value per 1.00 lot (USD/JPY) ≈ $6.90 per pip (example value; check your platform)

Step 1: Dollar Risk

$5,000 × 0.005 = $25

Step 2: Lot Size

Lot Size = $25 ÷ (35 × $6.90) = $25 ÷ $241.50 = 0.1035 lots

Rounding and verification

• If 0.01 increments: trade 0.10 lots.
• Max loss estimate: 35 × $6.90 × 0.10 = $24.15 (within the $25 plan).

Example 4: EUR/GBP (cross pair with non-$10 pip value)

For many cross pairs, the pip value per lot is not a neat $10. That’s why the formula uses pip value per lot explicitly.

Assumptions (USD account):

• Account Equity = $20,000
• Risk% = 1.25% (0.0125)
• Stop = 18 pips
• Pip Value per 1.00 lot (EUR/GBP) ≈ $12.40 per pip (example value; check your platform)

Dollar Risk

$20,000 × 0.0125 = $250

Lot Size

Lot Size = $250 ÷ (18 × $12.40) = $250 ÷ $223.20 = 1.1201 lots

Verification

18 × $12.40 × 1.12 ≈ $249.98

If your broker supports 0.01 increments, 1.12 lots is a clean, risk-matched size.

Rounding constraints and responsible adjustments

Know your minimum lot increment

Brokers typically allow one of these:

• 0.01 lot steps (most common on retail platforms)
• 0.10 lot steps (coarser sizing)
• 1.00 lot steps (rare for retail; common in some institutional contexts)

Rule: round down, then re-check risk

If your computed size is not tradable exactly, the safest default is:

• Round down to the nearest allowed increment.
• Recompute max loss using: Stop in Pips × Pip Value per Lot × Rounded Lot Size.

Rounding down keeps your risk at or below plan. Rounding up can quietly push you over your risk limit.

If rounding down makes the trade “too small”

Sometimes coarse increments (like 0.10) force you to risk far less than intended. Options that keep discipline intact:

• Accept the smaller risk (most conservative).
• Skip the trade if the size is impractically small relative to your plan.
• Only if it fits your trading plan, look for a setup with a different stop distance (not by moving the stop closer arbitrarily, but by choosing a different entry/structure that legitimately allows a tighter stop).

What you should not do: increase lot size after a loss to “get back to even.” Position sizing is a pre-entry calculation tied to a specific stop-loss distance.

Quick reference table (copy into your notes)

Exercises: compute lot size, then verify max loss

For each scenario: (1) compute Dollar Risk, (2) compute Lot Size, (3) round down to the nearest allowed increment, (4) verify the maximum loss if the stop is hit.

Scenario A (major pair, tight stop)

• Equity: $12,500
• Risk%: 0.8%
• Pair: EUR/USD
• Stop: 22 pips
• Pip value per 1.00 lot: $10.00
• Lot increment: 0.01

Scenario B (JPY pair, medium stop)

• Equity: $7,200
• Risk%: 1%
• Pair: EUR/JPY
• Stop: 48 pips
• Pip value per 1.00 lot: $6.60
• Lot increment: 0.01

Scenario C (cross pair, coarse lot steps)

• Equity: $30,000
• Risk%: 0.5%
• Pair: AUD/CAD
• Stop: 75 pips
• Pip value per 1.00 lot: $7.80
• Lot increment: 0.10

Answer check format (use this template)

Dollar Risk = Equity × Risk% = $____  Lot Size (raw) = Dollar Risk ÷ (Stop × PipValue) = ____ lots  Lot Size (rounded) = ____ lots  Max loss estimate = Stop × PipValue × RoundedLot = $____

When your max loss estimate is at or below Dollar Risk, your position sizing is consistent with your plan.