Position sizing is how you translate a trade idea into an exact number of lots so that a loss costs a fixed, planned amount. It is the single most practical skill in risk management.
The percent-risk model
Risk a small, fixed percentage of your account per trade — commonly 0.5% to 1%. On a $5,000 account, 1% is $50. Every trade is sized so that hitting your stop-loss loses about that amount, no more.
The sizing formula
Position size = (account × risk %) ÷ (stop distance in pips × pip value). If your stop is 25 pips away and a micro lot's pip value is $0.10, then $50 of risk ÷ (25 × 0.10) = 20 micro lots. Wider stops mean smaller size; tighter stops allow larger size — same money at risk either way.
Why fixed-percent survives
Risking a fixed percentage means your position shrinks automatically during a losing streak (each loss makes the account, and so the next position, smaller) and grows as you recover. It mathematically prevents the death spiral of risking more to win back losses.
Key takeaways
- Risk a fixed small % (0.5–1%) of the account per trade.
- Size = (account × risk%) ÷ (stop pips × pip value).
- Fixed-percent sizing shrinks risk in drawdowns and prevents the death spiral.