Working out position size
What you learn in 3 minutesPosition size is the number of lots you open. It is not a feeling and it is not a guess. It comes from three numbers you already have: the money you are willing to lose on the trade, the distance in pips from your entry to your stop, and the value of one pip on one standard lot of EUR/USD.
Working out 0.08 lots from three numbers
| Step | Amount | Note |
|---|---|---|
| Risk in money | KSh 2,600 | The amount you accept losing if the stop is hit. Here it is 2 per cent of a KSh 130,000 account. |
| Stop distance | 25 pips | The distance from entry at 1.0850 to the stop. One pip is 0.0001 on EUR/USD. |
| Pip value on one standard lot | KSh 1,300 | One pip on one standard lot is 10 units of the quote currency, converted at the current rate. At about KSh 130 to the unit, 10 units is KSh 1,300. |
| Risk per pip | KSh 104 | Risk in money divided by stop distance: KSh 2,600 divided by 25 pips. |
| Position size | 0.08 lots | Risk per pip divided by pip value: KSh 104 divided by KSh 1,300. That is 0.08 of a standard lot. |
Brokers round position sizes, and the pip value changes with the exchange rate. Some brokers also charge a spread or commission on top, and that varies between brokers.
The mistake people make here
The common mistake is to pick a lot size first, because 0.10 or 1.00 looks like a normal number, and then place the stop wherever the chart allows. That reverses the order. The stop distance is set by the chart, the risk in money is set by your plan, and the lot size is the answer you calculate last. If the answer comes out smaller than the broker's minimum, the honest choice is to skip the trade or widen nothing and accept a smaller risk, not to round the size up and hope.Check yourself
You will risk KSh 5,200 with a stop 40 pips away. One pip on one standard lot is KSh 1,300. What is the position size?
Risk per pip is KSh 5,200 divided by 40, which is KSh 130. Position size is KSh 130 divided by KSh 1,300, which is 0.10 lots.
You open 0.20 lots with a stop 30 pips away. One pip on one standard lot is KSh 1,300. How much money is at risk?
Pip value on 0.20 lots is 0.20 times KSh 1,300, which is KSh 260. Risk is KSh 260 times 30 pips, which is KSh 7,800.
Your account holds KSh 65,000 and you want to risk 2 per cent. How much is that in shillings?
2 per cent of KSh 65,000 is KSh 1,300.