Position size
Family III · Risk
Not to be confused with forex lot size, lot size in house, standard lot size.
Position size is the number of units, contracts, or lots committed to a trade. It is calculated from the amount of capital at risk and the distance between the entry price and the stop-loss level. Position size is distinct from the total account balance or the leverage available.
Calculating position size
For a given risk amount and stop distance, position size is derived by dividing the risk amount by the per-unit loss if the stop is hit. The per-unit loss is the stop distance multiplied by the value of one unit per price movement.
In markets where one unit moves one currency unit per point, the formula simplifies to risk amount divided by stop distance. In other markets, a contract multiplier or pip value must be included.
Worked example
An account holds 10,000 USD. The trader risks 1% (100 USD) on a trade with a 50-point stop distance, and each point is worth 1 USD per unit.
Position size and leverage
Leverage affects the margin required to open a position, not the position size itself. A larger position size increases both potential profit and potential loss. Risk management typically involves setting position size so that a stop-loss exit results in a predetermined loss, often a small percentage of account equity.
Often confused with
- forex lot size
- Forex lot size is a standardised unit of trade in the foreign exchange market, such as a standard lot of 100,000 units, whereas position size is the total quantity chosen for a specific trade; the visible sign is that forex lot size is a fixed contract specification, while position size is a calculated number.
- lot size in house
- Lot size in house refers to a broker's internal or proprietary definition of a lot, which may vary between brokers, while position size is the trader's chosen quantity; the visible sign is that lot size in house appears in broker documentation, whereas position size appears in the trader's risk calculation.
- standard lot size
- Standard lot size is a specific contract quantity, commonly 100,000 units in forex, while position size is the actual amount traded, which may be a multiple or fraction of a standard lot; the visible sign is that standard lot size is a constant, whereas position size varies per trade.