Position sizing, worked through properly
Position sizing is the one part of trading that is pure arithmetic, with no judgement and no forecasting involved. It is also the part beginners most often get wrong, because the formula everyone quotes assumes a standard pip value that is simply not correct for every pair.
This article works through five real cases end to end, including the two that catch people out: a yen pair, where the pip is in a different decimal place, and a cross where your account currency does not appear in the pair at all.
Key takeaways
- Position size is derived from the stop distance, never chosen first
- Pip value depends on the pair and your account currency, it is not fixed
- JPY pairs move the pip two decimal places, which changes everything
- For crosses you need the conversion rate at the time of the trade
- Round position size down, never up
The formula, and the part people skip
Position size equals risk amount divided by (stop distance in pips multiplied by pip value per unit). Everyone can recite this. The failure is almost always in that last term, which people treat as a constant when it is not.
Pip value depends on three things: the pair, the size of the position, and the currency your account is denominated in. Assume a fixed £10 per pip and you will be correctly sized on some trades and badly wrong on others, without any obvious signal telling you which is which.
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Frequently asked questions
Yen pairs are quoted to two decimal places rather than four, so one pip is 0.01 instead of 0.0001. The pip is a different size, which changes the value per pip and therefore your position size.