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Position-Sizing Cheat-Sheet
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Learn the 1% rule, position size formulas, ATR sizing and risk/reward.
Why position sizing beats “gut feel”
Position sizing is how you translate a trade idea into the exact number of shares, lots, or contracts, so one loss never blows your account. Get this right and you smooth equity curve volatility, cap drawdowns, and make your strategy’s edge actually show up.
Why it matters: small, consistent risk per trade (often 0.5–2%) + disciplined stops = survivability
The core formula
Position size (units) = (Account Balance × Risk %) ÷ (Stop Distance × Value per point per unit)
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Stop Distance = |entry − stop| (in points, pips, ticks).
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Value per point per unit = £1 for shares; for CFDs/spread bets use your stake/point; for futures use tick value ÷ tick size; for FX use pip value per micro/mini/standard lot.
Example (shares/CFD): £10,000 account, risk 1% (=£100), entry 100, stop 95 (distance 5), value/point 1 → size = £100 ÷ (5×1) = 20 units.
Quick reference: sizing by instrument
Shares / ETFs
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What’s a “point”?
A £1 (or $1/€1) move in the share price. -
Value per point per 1 unit: ≈ 1 (one share gains/loses £1 when price moves £1).
⚠️ UK quirk: some tickers show GBp (pence). If quoted in pence, a “point” is 1p; convert to pounds for consistency (100p = £1).
Sizing:
Size (shares) = Risk £ ÷ Stop distance (in £).
Example: Risk £100, entry £10.00, stop £9.60 → stop distance £0.40 → size = 100 ÷ 0.40 = 250 shares.
CFDs / Spread bets
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You don’t buy “units”; you choose a stake per point (e.g., £1/pt, £2/pt).
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Value per point per 1 “unit”: by definition 1 (because the “unit” is £1 per point).
Sizing (output is stake/point):
Stake/pt (£/pt) = Risk £ ÷ Stop distance (points).
Example: Risk £120, stop distance 12 pts → stake = 120 ÷ 12 = £10/pt.
(If broker allows decimals, round down e.g., £10.00 → £9.90 for a tiny buffer.)
Futures
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Futures move in ticks. Each contract has:
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Tick size (minimum price change), and
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Tick value (currency value of one tick per 1 contract).
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Value per point per 1 contract = Tick value ÷ Tick size.
Sizing:
Contracts = Risk £ ÷ (Stop distance (points) × Value/point/contract).
Example (E-mini S&P): tick size 0.25, tick value $12.50 → value/point = 12.50 ÷ 0.25 = $50/pt.
Risk $250, stop 6.0 pts → size = 250 ÷ (6×50) = 0.83 → 0 contracts (trade micro or widen stop).
Tip: Specs vary (e.g., DAX: €25/pt; Micro ES: $5/pt). Always check the contract’s tick size and tick value.
Forex (spot/CFD)
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Define a pip (usually 0.0001 or 0.01 for JPY pairs).
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Pick a lot size: 1.00 (standard), 0.10 (mini), 0.01 (micro).
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Pip value per 1 lot depends on the pair and account currency.
Easy case (account currency = quote currency):
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EUR/USD: 1.00 lot ≈ $10/pip; 0.10 lot ≈ $1/pip; 0.01 lot ≈ $0.10/pip.
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USD/JPY: 1.00 lot ≈ ¥1000/pip (convert ¥→$ if your account is in USD/GBP).
General conversion:
Pip value (account ccy) = Pip value (quote ccy) × (Quote ccy → Account ccy rate).
Then treat Stop distance in pips as “points”.
Sizing:
Lots = Risk £ ÷ (Stop pips × Pip value per 1 lot (in £)).
Example (EUR/USD, GBP account): Risk £100, stop 25 pips, pip value per 1.00 lot ≈ $10. If GBPUSD = 1.2500, then $10 → £8.00.
Lots = 100 ÷ (25×8) = 0.50 lots.
Practical tip: if you use TradingView it will calculate the position size for you. All you have to do is pick the instrument you want to trade, add a stop loss and the amount of risk you're willing to trade (1% of total balance is recommended).
Risk/Reward & Expectancy
Add a take profit
Unit size calculates automatically
Add risk %
Add a stop loss
R multiple = how much you make or lose relative to your risk.
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Example: Risk £100. Profit £200 = +2R. Loss £100 = −1R.
Expectancy = your average outcome per trade (in R).
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Formula: (Win% × Avg Win R) − (Lose% × Avg Loss R).
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If this number is > 0, your strategy has an edge—assuming you size consistently.
Drawdowns & risk of ruin - reality check
Higher risk per trade = deeper, longer drawdowns. Halving risk often cuts max drawdown dramatically with only a modest effect on long-run returns. If a losing streak of 8–12 trades would push you past your pain threshold, you’re oversizing
Common mistakes to avoid:
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Moving stops to “make size fit” (backwards). Set stop first, then size.
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Ignoring fees/slippage—add a safety buffer (e.g., 0.1R).
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Oversizing correlated trades (counts as one bet).
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Letting leverage dictate size (let risk % dictate).
What is position sizing in trading and why is it important?
Position sizing is determining how many shares/lots/contracts to trade based on your account size, stop-loss, and risk per trade. Good risk management and position sizing cap losses, smooth drawdowns, and help your strategy’s edge show up.
How do I calculate position size?
Use the universal formula: Position size = (Account Balance × Risk %) ÷ (Stop Distance × Value per point per 1 unit). This works for stocks, forex, CFDs/spread bets, and futures.
What risk percentage should I use—1% or 2%?
Many traders start with 0.5–1% risk per trade; experienced traders sometimes use up to 2% on liquid markets. Smaller risk gives a longer runway during losing streaks and reduces risk of ruin.
Does the position sizing formula change for forex vs stocks vs futures?
No—the formula is the same. Only “value per point per 1 unit” changes (shares≈1 per share; forex uses pip value; futures use tick value ÷ tick size; spread bets output stake/point).
How do I find pip value, tick value, or per-point value?
Shares/ETFs: ~1 per share (a £1 move = £1 per share). Forex: pip value depends on lot size and currency; convert into your account currency if needed. Futures: check contract specs for tick size and tick value. Spread bets: your unit is £/pt stake.
Should I round my position size?
Yes—round down to keep risk under your limit. For spread bets, your stake per point can often use decimals (e.g., £1.25/pt), but still round down for a safety buffer.
How do I choose my stop-loss distance?
Set the stop using market structure (swing high/low), volatility (e.g., ATR stops like 1–3×ATR), or a rule in your trading plan. Then size the position to your chosen risk %—never the other way around.
What risk/reward ratio (R:R) should I aim for?
Many strategies target 1.5R–3R or higher. Your expectancy depends on both win rate and average R: (Win% × Avg Win R) − ((1−Win%) × Avg Loss R).
How do leverage and margin affect position sizing?
Leverage changes how much you can buy, not how much you should risk. Always let risk % and stop distance determine size; ensure margin requirements are met after sizing.
How do I manage multiple or correlated positions?
Cap total open risk (e.g., ≤4–6R). Treat highly correlated trades (e.g., similar FX pairs or sector stocks) as one bet and reduce individual sizes accordingly.