Working out position size
What you learn in 3 minutesPosition size is the number of lots you open. It is the last number you work out, not the first. You start with the money you are willing to lose on the trade, then the distance to your stop, then the value of one pip. Divide the first by the second, then by the third. This lesson shows the order, because getting the order wrong is how a small account disappears in a few trades.
A$20 of risk over 25 pips on AUD/USD
| Step | Amount | Note |
|---|---|---|
| Risk in money | A$20 | This is the amount you have decided you can lose on this one trade. It comes from your own plan, not from the market. |
| Stop distance | 25 pips | The distance from your entry price to your stop price. On AUD/USD, one pip is 0.0001, so 25 pips is 0.0025. |
| Pip value per standard lot | A$10 | One pip on one standard lot of AUD/USD is 10 units of the quote currency. At an AUD/USD rate near 0.6640, that converts to about A$10 per pip. The exact figure moves with the rate and varies between brokers. |
| Position size | 0.08 lots | A$20 divided by 25 pips gives A$0.80 per pip. A$0.80 divided by A$10 per pip gives 0.08 lots. |
Your broker may round the lot size to the nearest 0.01 lots, and the pip value it shows may differ slightly because of the conversion rate and any commission or spread charged on top. Check the contract specifications your broker publishes.
The mistake people make here
The common mistake is to pick a lot size first, because it looks like a round number, and then place the stop wherever it fits. That reverses the order. A 0.50 lot position with a 25 pip stop on AUD/USD risks about A$125, not A$20, and six losses in a row would take most of a small account. Work out the stop distance and the pip value first, then let the lot size be the answer. If the answer is smaller than your platform allows, the trade is too large for your plan, and the correct action is to skip it.Check yourself
You risk A$30 on a trade with a 20 pip stop on AUD/USD, and one pip is worth A$10 per standard lot. What position size does that give?
A$30 divided by 20 pips is A$1.50 per pip. A$1.50 divided by A$10 per pip is 0.15 lots.
You open 0.10 lots on AUD/USD with a 30 pip stop, and one pip is worth A$10 per standard lot. How much money is at risk?
0.10 lots is one tenth of a standard lot, so one pip is worth A$1. 30 pips multiplied by A$1 is A$30.