Computing size from your stop — worked example

This is the calculation referenced from the Forex track, worked end to end. The principle: you fix the money you will risk, measure the distance to your stop, and let those two numbers determine the size. You never pick the size first.

The formula

Position size = (Account equity x Risk %) / (Stop distance x value per unit of distance)

The numerator is your risk in money. The denominator is what one position-unit loses if the stop is hit. Divide and you get the exact size that loses precisely your risk budget and no more.

Worked example — a stock

Account equity        = US$20,000
Risk per trade        = 1%  ->  risk in money = US$200
Entry price           = US$50.00
Stop-loss price       = US$48.00
Stop distance         = 50.00 - 48.00 = US$2.00 per share

Shares = risk in money / stop distance
       = 200 / 2.00
       = 100 shares

Buy 100 shares. If the stop hits, you lose 100 x US$2.00 = US$200 — exactly 1%. A wider stop forces a smaller position; a tighter stop allows a larger one. The risk in dollars stays fixed either way.

Worked example — a forex pair

Account equity        = US$10,000
Risk per trade        = 2%  ->  risk in money = US$200
Stop distance         = 25 pips
Pip value (mini lot)  = US$1 per pip per mini lot

Size in mini lots = risk in money / (stop in pips x pip value per lot)
                  = 200 / (25 x 1)
                  = 8 mini lots

Trade 8 mini lots. A 25-pip stop then costs 8 x 25 x US$1 = US$200 — exactly 2%.

The takeaway

The market sets the stop distance (where your idea is proven wrong); you set the risk in money. Size is the output, never the input. Internalise this and you have the single most valuable habit in trading.