Using the correct position size is one of the most important skills in trading. It is not just about how much you can trade, but how much you should trade based on your account size, and expectations.
Many traders prioritize finding the best entry point, or they try to predict price direction. But they often ignore position sizing. This is what controls how much they win or lose per trade. Even a good strategy can fail with poor sizing.
In this article, we will break down how position sizing works, how it connects to leverage and margin.
Position sizing refers to the number of units or lots you trade in a single position. It directly affects how much you gain or lose when the market moves. Instead of randomly choosing a lot size or trading based on emotion, professional traders determine their trade volume based on calculated risk.
This concept is closely tied to your trading capital and your stop-loss level. For example, if you risk 2% of a $5,000 account with a 50-pip stop, your position size will be larger than if your stop is 100 pips. Keeping your positions under control helps you manage risks, and avoid emotional trading.
Used properly, it is a core part of risk management and helps you avoid overexposure when trading highly leveraged products like forex and CFDs.
Leverage can be useful, but without proper risk management, it can easily work against you. Many new traders chase high leverage, hoping to flip small accounts into big wins overnight. But this mindset often leads to oversized positions, impulsive decisions, and accounts wiped out before they even get started.
Position sizing brings structure and discipline to your trading by requiring you to set your risk level before entering a trade. While leverage gives you access to larger trades, it’s the amount you choose to risk that truly defines your market exposure.
Let’s say two traders both use 1:100 leverage. One risks 1% of their account per trade with a calculated lot size. The other just maxes out their margin. The first trader is managing risk. The second is gambling.
In short, it gives you the capacity to take bigger trades, but position sizing controls how much of your capital is truly at risk.
To calculate your ideal trade size, you need three key inputs:
This is the portion of your trading capital you are willing to risk on a single trade. Most disciplined traders risk between 1% and 2% of their account per trade. For example, if you have a $10,000 account and you are risking 2%, your maximum loss on any trade should be $200.
Your stop-loss defines how far the price can move against your trade before you exit. The wider the stop-loss, the smaller your position size should be to stay within your risk limits. A tighter stop-loss allows for a larger position, but it may get hit more easily due to volatility.
This is the monetary value of one pip movement, which depends on the currency pair and the trade size. For standard lots (100,000 units), the pip value for most USD pairs is $10. For mini lots (10,000 units), it is roughly $1, and for micro lots (1,000 units), about $0.10.
These three factors work together in a simple formula that tells you how big your position should be to stay within your risk tolerance.
There is no single way to size your trades. The right method depends on your trading style, how much risk you can handle, and how consistent your strategy is.
Below are some of the most practical methods used by forex and CFD traders to manage lot size when trading.
This is the most common approach. You risk a fixed percentage of your total account balance on each trade, usually 1 or 2 percent.
Example: If your account is $5,000 and you risk 2 percent per trade, the maximum you can lose is $100.
The lot size will change depending on your stop-loss level, but the risk stays the same.
This method helps protect your capital and avoids large losses on a single trade.
With this method, you always trade the same lot size, no matter what your account balance or stop-loss level is.
Example: You always trade 0.10 lots per position.
It is simple to follow but risky, since your losses can vary depending on market conditions.
Fixed lot sizing is usually not recommended unless you have a very consistent strategy and know your risk limits well.
This method adjusts your position size based on how volatile the market is. If the market is moving fast, you trade smaller. If it is calm, you can trade slightly larger.
Tool used: ATR (Average True Range) is commonly used to measure volatility.
How it works: You set your stop-loss based on the ATR, then calculate the lot size based on your account risk percentage
This approach works well in fast-moving or unpredictable markets and helps keep your risk level steady.
The Kelly Criterion is a mathematical formula used to calculate lot size based on your strategy’s win rate and reward-to-risk ratio.
How it works: You need to know how often you win and how much you make compared to how much you lose.
The formula tells you the ideal percentage of your capital to risk for maximum long-term growth.
This method is more advanced and works best if you have a lot of data on your past trades.
Once you understand the key inputs, calculating your position size becomes a simple routine. This step-by-step method works for any forex pair or CFD instrument.
Choose a percentage of your account that you are comfortable risking on one trade. Most traders stick with 1 or 2 percent.
Example: If your account balance is $10,000 and you risk 2 percent, your maximum loss should be $200.
Your stop-loss depends on your trade setup, strategy, and market conditions. You can define it based on a key technical level, number of pips, or a volatility measure like ATR.
Example: You decide to set a 50-pip stop-loss on your EUR/USD trade.
The pip value tells you how much money each pip movement is worth. It depends on the currency pair, your lot size, and account currency.
Quick guide:
You can use online pip value calculators if you're not sure.
Now you can calculate how many lots to trade:
Position Size = (Account Risk in $) ÷ (Stop-Loss in Pips × Pip Value)
Example:
This means you should trade 0.40 lots on this setup to risk exactly $200.
Before placing the trade, check if your account has enough margin to open the position. Your leverage will affect how much margin is required.
If your available margin is too low, reduce the lot size accordingly to stay within your limits.
Leverage allows you to control larger positions with a smaller amount of capital. While this can increase potential profits, it also increases your risk if the trade goes against you. Relying only on leverage can be risky. Managing your trade size is key.
Each trade you open requires a certain amount of margin. If your position is too large, you might not have enough available funds in your account, which could lead to a margin call. To fully understand how this works, check out our articles on what is leverage and what is margin?
Here’s how to determine the lot size when trading EUR/USD.
Scenario:
Step-by-step:
So, for this trade, you would open a position of 0.25 lots to stay within your $100 risk limit.
Calculating lot sizes by hand can slow you down, especially during active trading. The good news is that there are reliable online tools that can help you calculate your trade size quickly and accurately.
Websites like Myfxbook, Babypips, and EarnForex offer free calculators. All you need to do is enter your account size, risk percentage, stop-loss in pips, and the currency pair you're trading. These tools will instantly show your ideal lot size for that trade.
These tools are especially useful if you trade multiple pairs with different pip values or use varying stop-loss distances. Even experienced traders use them to stay consistent and avoid miscalculations.
Many traders understand the theory of risk management but still make mistakes in real trading. Here are several of them to watch out for:
Trading Without a Stop-Loss
Skipping a stop-loss means you have no defined risk, which makes your position size meaningless. Always plan your exit before you enter.
Risking Too Much per Trade
Going above 2 or 3 percent risk might feel tempting when you’re confident, but it only takes a few bad trades to damage your account. Stick to consistent risk levels.
Ignoring Volatility
Using the same lot size in all conditions can backfire. Volatile markets need wider stop-losses and smaller positions. Calm markets allow for tighter stops and slightly larger trades.
Overleveraging
Even if the size of the trade is technically correct, using too much leverage can stretch your margin and lead to early stop-outs or margin calls.
Not Considering Correlation
If you open multiple trades in correlated pairs, your total exposure may be higher than expected. For example, being long EUR/USD and GBP/USD at the same time increases your overall USD risk.
In real trading, you often have more than one position open at a time. It is important to manage your overall exposure across all trades, not just each one individually. This becomes even more important when trading correlated pairs like EUR/USD and GBP/USD or overlapping assets like gold and silver.
If you're risking 2 percent per trade and open three similar trades, you might unknowingly put 6 percent of your account at risk on the same idea. To avoid this, many traders reduce the risk per trade when running multiple positions or skip overlapping trades altogether.
Another approach is to scale in and out of trades. Instead of entering your full position all at once, you can start small and add to the position if the trade moves in your favor. This helps reduce initial exposure while still allowing room to build into a setup.
You can also scale out by closing part of your position at a target level while letting the rest run. This can lock in partial profits while giving the trade space to reach a larger goal.
Can I use the same method for scalping and swing trading?
Not always. Scalping usually involves tighter stops and faster trades, which may need smaller sizes to handle volatility. Swing trades may allow larger stops but need more margin.
How do I size positions when trading multiple correlated pairs?
Reduce your risk per trade or avoid doubling exposure on similar moves. Correlated trades often behave like one larger position.
What if I trade different asset classes like forex, indices, and gold?
Each instrument has different pip values, volatility, and margin requirements. Adjust your position size based on the unique characteristics of each asset.
Can I adjust position size mid-trade if the market changes?
You can scale in or out, but it should be part of your plan, not a reaction. Avoid changing your size emotionally after the trade is open.
How do professional traders avoid overexposure with high leverage?
They set strict risk limits and calculate exposure across all trades. Leverage is used strategically, not to maximize size, but to improve flexibility.
Should I risk more on trades with a higher probability of success?
Some traders do, but it requires proven data and confidence in your strategy. If unsure, it’s safer to stick with fixed risk levels.
Then Join Our Telegram Channel and Subscribe Our Trading Signals Newsletter for Free!
Join Us On Telegram!