Position sizing means deciding how big a trade to take, so that if your stop is hit you lose only an amount you picked before you entered.
The formula
Position size = the amount you are willing to lose, divided by (the distance to your stop, multiplied by the value of each unit of that distance).
Example. Account: $10,000. You risk 1%, which is $100. Your stop is 25 pips away. On EUR/USD, one pip on a standard lot (100,000 units) is worth about $10, so each lot would lose about 25 x $10 = $250 if stopped. Size = $100 / $250 = 0.4 lots. Pip values depend on the instrument and your account currency, so check the contract specification. This is arithmetic, not advice.
Why fix the percentage
Losing streaks happen to everyone. What matters is how much a streak costs.
- Risking 1% per trade, ten losses in a row cost about 9.6% of the account ($10,000 x 0.99 to the power of 10).
- Risking 5% per trade, the same ten losses cost about 40.1% ($10,000 x 0.95 to the power of 10).
The first leaves you in the game. The second would break the loss limit of almost any challenge, long before you had a chance to recover.
Habits that help
- Decide the stop and the size before you enter, not after.
- Include costs such as spread and commission in the distance to your stop.
- Never widen a stop to keep a position size you already chose. Shrink the size instead.
This is general information, not advice. It does not consider your situation, and trading carries a high risk of loss.