Position Sizing in Forex: Worked Examples on EUR/USD, USD/JPY and GBP/JPY
How to turn a risk amount and a stop distance into a lot size: worked calculations on three pairs, the effect of spreads, and what losing streaks do to an account.
Most traders pick an entry, place a stop, and then choose a lot size by feel. The order should be reversed. Once you know how much you are willing to lose on the trade and where the trade is proven wrong, the lot size follows from arithmetic.
This guide gives the formula, applies it to three pairs, and shows what happens when the risk per trade is set too high. All rates and account figures below are illustrative, not current quotes.
In this article
The formula
Position size in lots \= amount at risk ÷ (stop distance in pips × pip value per lot)
Three inputs, in this order:
- Amount at risk. A fixed percentage of your account, in your account currency. On a $10,000 account, 1% is $100.
- Stop distance. The number of pips between your entry and the level where the trade idea is wrong. It comes from the chart, not from the amount you want to risk.
- Pip value per lot. What one pip is worth for a standard lot of 100,000 units, converted into your account currency.
Pip values in 30 seconds
For most pairs, a pip is the fourth decimal place, 0.0001. For yen pairs, quotes have only two decimals, so a pip is 0.01, a movement from 154.01 to 154.02 for example (OANDA). A standard lot is 100,000 units, with mini lots of 10,000 and micro lots of 1,000 (IG).
The GBP/JPY detail catches people out. The pip is in yen, so you convert with USD/JPY, not with the GBP/JPY rate.
- EUR/USD: the pip is quoted in dollars. 100,000 × 0.0001 \= $10 per pip per standard lot.
- USD/JPY and GBP/JPY: the pip is worth 100,000 × 0.01 \= ¥1,000 per lot. To get dollars, divide by the USD/JPY rate. At an illustrative 150.00, ¥1,000 is $6.67.
Three examples, one risk budget
Account: $10,000. Risk: 1%, which is $100 per trade.
Notice what drives the result. The risk is $100 in each case, but the position shrinks as the stop gets wider and as the pip value falls. The wider-ranging pair does not get a bigger position just because it looks like it offers more room to profit.
Always round down. At 0.37 lots on USD/JPY the real risk is 0.37 × 40 × $6.67, about $98.67. Rounding up to 0.38 would have taken you over budget.
| EUR/USD | USD/JPY | GBP/JPY | |
|---|---|---|---|
| Stop distance | 25 pips | 40 pips | 60 pips |
| Pip value per lot | $10.00 | $6.67 (¥1,000 at 150.00) | $6.67 (¥1,000 at 150.00) |
| Loss per lot at the stop | $250 | $267 | $400 |
| Lots \= $100 ÷ loss per lot | 0.40 | 0.375, so 0.37 | 0.25 |
Include the spread in the stop
A stop order is triggered at the quote for the side you are closing. If you buy at the ask, your stop typically triggers on the bid. So the practical distance includes the spread. On the EUR/USD example above, a 1-pip spread turns a 25-pip stop into 26 pips of exposure.
That is a 5% smaller position for one pip. Spreads and fees also change what you pay to open the trade, which we cover in the guide to spreads, commissions and swaps. Remember too that stops do not always fill at the stop price. A gap or fast market can fill them worse, so the calculated risk is a budget and not a guarantee.
- Lots at 25 pips: $100÷($10 × 25) \= 0.40
- Lots at 26 pips: $100÷($10 × 26) \= 0.38 (rounded down from 0.3846)
Risk and margin are different numbers
Beginners often mix up what they might lose with what the broker holds as margin. Under ESMA's rules, major currency pairs, meaning any two of the US dollar, euro, yen, pound, Canadian dollar and Swiss franc, can be leveraged at 30:1 for retail clients, which means 3.33% initial margin. The UK FCA applies similar protections.
Take the EUR/USD example at an illustrative 1.1000. A 0.40 lot is 40,000 euros, or $44,000. Margin at 30:1 is about $1,467. That sum is tied up in the account, but your maximum planned loss on the trade is the $100 you sized for. The two numbers answer different questions: margin tells you whether the broker lets you open the trade, and risk tells you what the trade can cost.
ESMA's rules also require the provider to close positions when the account's funds plus unrealised profits fall below half of the initial margin, and they cap losses at the account balance through negative balance protection. Those are safeguards for the broker's retail clients and are no substitute for a position-sizing rule.
What losing streaks do at different risk levels
Even a good strategy has strings of losers. The table shows the account after ten consecutive losses, starting from $10,000, with a fixed percentage risked on each trade.
The math is compound: each loss comes off a smaller balance, so a loss of x% needs a gain of 1 ÷ (1 − x) − 1 to get back. At 5% risk per trade, ten losses in a row need a 67% gain on the remaining capital just to break even. Whether ten losses in a row is likely depends on your win rate, and you should work that out from your own trade log. The point here is how quickly the recovery requirement grows.
There is no regulatory standard for the right percentage. Pick a level you can stay with through a bad run and write it down.
| Risk per trade | Balance after 10 losses | Drawdown | Gain needed to recover |
|---|---|---|---|
| 1% | $9,043.82 | 9.56% | 10.6% |
| 2% | $8,170.73 | 18.29% | 22.4% |
| 5% | $5,987.37 | 40.13% | 67.0% |
A checklist before each trade
- Fix the risk in money: the fixed percentage of the current balance, in account currency.
- Measure the stop on the chart, then add the spread.
- Find the pip value per lot in your account currency. For JPY pairs, divide ¥1,000 by the current USD/JPY rate if your account is in dollars.
- Compute lots, then round down to the size your platform allows.
- Check margin against free funds so a second trade can still be opened.
- Log the result. After 50 trades you will know your real average loss versus your planned one, and that gap is worth more than any rule of thumb.
Sources
- OANDA, Price units in leverage trading (what is a pip)
- IG, Pip value definition
- ESMA, Additional information on the agreed product intervention measures relating to CFDs and binary options
- ESMA, ESMA agrees to prohibit binary options and restrict CFDs to protect retail investors (27 March 2018)
- FCA, FCA confirms permanent restrictions on the sale of CFDs and CFD options to retail consumers
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