How to Calculate Position Sizes for Trading
If you’re new to trading then calculating position sizes and tracking your risk can seem a bit daunting. The process is actually fairly easy and involves determining your risk, calculating the value per pip and finding the lot size. However, I’m going to recommend using a position size calculator. There’s plenty available for free, they're quick, and just saves our mental energy to focus on the trading.
The problem is these don’t always cover all the assets you're trading. That’s when it comes in useful to understand how to do it manually.
How to Calculate Position Sizes
There’s a few things you’ll need to know ahead of time:
- Your account balance
- The percentage of your account which will be at risk
- The number of pips at risk, based on the distance between your entry and the stop loss.
- The value of each lot or contract per pip.
- And the exchange rate of your account currency.
That may seem like a lot of things! But don’t worry, we’ll walk you through each of the calculations which are all really simple. I’d recommend taking a note of this process so you can always refer back to it if you ever need it. We’ll use US dollars for our account currency in these examples, but you just need to change that for whatever currency your account is in.
Trade Value
To get started, the first thing we need to know is your trade value. This is how much money you’ll have at risk on that trade.
We take our account balance and multiply that by the risk percentage. So, if our account is worth $20,000, and we want to risk 1.5%, it’s 20,000 multiplied by 0.015, which equals 300 dollars.
$20,000 x 0.015 = $300
That’s our total risk. Next we need to know the value per pip. That's how much each pip is worth.
Value Per Pip
We take the total risk of 300 dollars and divide it by the number of pips to the stop loss. If our stop loss is 15 pips, it’s 300 divided by 15. That means each pip is worth $20.
$300 / 15 = $20
Easy. The next part is a little more complicated as you need to account for exchange rates and the number of ticks in a pip.
We need to know what the price per pip is of each lot. So, if we bought one full lot, what is each pip worth? This information can usually be found in the data sheet of that asset on your brokers website, although these are generally pretty standard.
This price per pip is going to be quoted in the currency the asset is traded in. For the S&P 500, it’s likely going to be in US dollars. For FX, it’s going to be the quote currency. So, for EUR/USD this will be in dollars also. If this is different to your account currency, we’ll need to exchange it.
For EUR/USD each pip is worth $10. This will be the case for most currencies, they will be 10 of whatever the quote currency is. A notable exception is the Japanese yen which is usually ¥1000.
Other assets such as commodities and indexes may also be different but there are lists available online which give these details. Most commodities are also 10 per pip, while indexes are typically 1 per point.
So, at the current exchange rate, 10 US dollars are worth 10 US dollars. Obviously, but just to show in case you need to exchange it! So, if you’re trading in GBP, it would be £7.87.
That means for one full lot, the price movements are worth $10 dollars for every pip.
Lot Size
We we take our price per pip from earlier which was based on our risk, which was $20 and divide that by the value per pip of each lot which is $10. That gives us the number of lots which is 2.
20 / 10 = 2
So, now you can open the trade with 2 lots. And that’s it for calculating your lot size. But as we mentioned earlier, you’ll want to use online calculators where you can.