Deciding how much to rise per trade is a crucial part of financial trading. While stop-loss ensures you cut losses rarely, proper position sizing means balancing risk and ensuring that not a single losing trade can widen your account. Position size calculator is among the core financial trading concepts. Determining exactly how much money to allocate to a single trade based on your risk tolerance and account balance is crucial. Without proper position sizing, catastrophic losses are inevitable, while when using correct position sizing, you can withstand consecutive losses. In this guide, we will outline the main principles for correctly determining your next trading position size, no matter the market.
Foundations of proper position sizing
Position sizing is crucial in every single market, like Forex, crypto, stocks, and so on. However, it is most popular among Forex traders as this market is by far the largest financial market, and its participants know how to manage their risk properly. As a result, there are many free Forex position size calculators available online, and they allow investors to exactly calculate the perfect lot size before risking hard-earned money. To calculate position size, traders must consider several key factors, including risk percentage, account size, stop-loss distance, and volatility.
Risk percentage principle
It is an axiom in financial trading that risking more than 1-2% of your balance on any account is a terrible idea. Never risk more than 1-2% of total capital per trade. For example, a 50,000 USD account, max loss per trade should be around 500 to 1000 USD and no more. This way, even after several losses in a row, the account is protected and ready for your next profit. If your risk is 5% per trade, it will take 14 losses to blow 50% of a whole trading account, while at 1% risk, it will take 68 losses, which is unreal.
Key inputs for position size calculation
Main inputs to calculate position size include account size, stop-loss distance, and volatility. You need to know how many pips your stop loss orders are on average to calculate accurate position size. You also base all calculations on your current equity on a trading account. For example, if you have a 1,000 USD trading account and an average stop-loss is around 10 pips, with 2% risk per trade, the correct position size would be 0.2 lots on Forex pairs and around 0.1 lots in commodities, including gold. You can also use metrics like Average True Range (ATR indicator) to set dynamic stops.
Core formula
Position Size = Risk Amount / (Entry Price – Stop Loss Price)
Here is an example to use this formula on a 10,000 USD trading account, 1% risk per trade (100 USD), stock entry at 50 USD, stop-loss 45 USD. The position size for this theoretical scenario will be equal to $100 / ($50 – $45) = 20 shares. Conversely, for Forex EUR/USD trading, the position size for the same parameters, including 45 pips of stop-loss, will be around 0.2 lots.
Asset-specific position sizing
Let’s outline position sizing formulas for each popular asset class.
Stocks
The fixed dollar risk model allocates a fixed dollar amount per trade and is simple, but it ignores account growth. The percentage risk model means to risk a certain percentage on each trade like 1% or 2%. Shares = (Account Balance × Risk%) / (Entry – Stop Loss). There is a volatility-adjusted sizing as well, like Stop-loss = 2 x ATR, for example. However, risking 2 ATR means traders have larger stop-loss distances, and the risk-reward ratio suffers.
Forex
In Forex, pip-based calculations are crucial. Pip value for EUR/USD is 10 USD for standard lots (100,000 units), 1 USD for mini lots (10,000 units), and 0.10 USD for micro lots (1,000 units). Unit = (risk amount) / (stop-loss in pips X pip value). For example:
Cryptos
Crypto trading sometimes comes with fees, and you need to include those commissions in your position sizing and win rate dynamics. For example, if the fee is 0.3% per trade, then adjusted risk would be Target risk – fees.
Long-term investing
If you are planning to just become an investor, it is essential to build your portfolio slowly over time. You should be allocating around 5% for each single stock to diversify your portfolio and avoid a single point of failure. One effective method is called pyramiding, but it has nothing to do with pyramid schemes. This way, investors build their positions gradually, like investing 50% initially and then 25% later to slowly build their portfolio and make it more robust and time-resistant.