Position sizing from a signal: the formula, with gold and forex examples

Lot size is the one number you control on every signal, and it is the number that decides whether a normal losing month is a scratch or the end of the account.

The formula

Lots = (account balance × risk per trade) ÷ (stop distance in pips × pip value per lot, in your account currency)

Three inputs you choose or read off the signal, one you look up once per pair. Then round down to your broker's lot step. If your account is not in dollars, the pip value is converted into your currency inside the formula, not ignored: a pound account divides the dollar pip value by the GBP/USD rate of the day.

• Account balance: what is in the account now, not what you hope will be.
• Risk per trade: the fraction you are willing to lose if the stop is hit. 1% is the common answer and a good default. 0.5% for a funded account with a daily loss limit. 2% only once you have been through a losing streak at 1% and kept to your rule.
• Stop distance: from the signal's entry to its SL, in pips.
• Pip value per standard lot: depends on the pair and your account currency.

Pip values you need

For a USD account, one standard lot (100,000 units):

On gold we count pips in tenths of a dollar: a move from 2,410.0 to 2,411.0 is 10 pips. The examples assume the common contract of 100 ounces per lot, so a ten-cent move on one lot is $10; some brokers use a different contract size, so check your broker's specification once before trusting any gold example. Some brokers display an extra decimal on gold; that is a pipette, ignore it for sizing. If your account is in GBP or EUR, convert the pip value at the day's rate before you divide; the conversion belongs in the formula.

Worked example 1: EUR/USD

Account $5,000, risk 1%, so $50 per trade. Signal: entry 1.0850, SL 1.0825, a 25-pip stop.

Lots = 50 ÷ (25 × 10) = 0.20 lots. A full stop costs $50. TP1 at 25 pips returns $50, TP3 at 75 pips returns $150.

Worked example 2: GBP/JPY

Same account and risk. Entry 190.50, SL 190.05, a 45-pip stop. Pip value $6.67 with USD/JPY at 150.

Lots = 50 ÷ (45 × 6.67) = 0.167, round down to 0.16 lots. Rounding down keeps risk under $50; rounding up takes it over. Always down.

Worked example 3: gold

Same account and risk. Entry 2,410.50, SL 2,418.50, an 80-pip stop ($8.00 of price).

Lots = 50 ÷ (80 × 10) = 0.0625, round down to 0.06 lots. A full stop costs $48.

Now the member with about $900 and 0.9 lots. At 0.9 lots gold, one pip is $9. A 50-pip stop is $450, about half the account. Two normal stops and the account is gone. At 1% risk he should have been at 0.01 lots (the smallest most brokers allow), risking $5 on a 50-pip stop, and if the maths said 0.002 lots he should have skipped gold until the account was larger. That is not a comment on him; it is what the formula returns.

When the answer is smaller than 0.01

Micro lots stop at 0.01 on most brokers. If the formula gives you less, the answer inside your rule is to skip that signal, or to take only the signals whose stop distance fits at 0.01. Taking it anyway means the trade risks more than your rule (0.01 lots on an 80-pip gold stop is $8; on a $500 account that is 1.6%); if you do that knowingly, it is a decision to exceed the budget, not a sizing method, and it should be rare. Do not raise your risk rule to make the number fit.

Why a fixed lot size is the wrong shortcut

"I always trade 0.10" means your risk changes with every signal's stop. A 20-pip stop risks $20, a 60-pip stop risks $60, on the same rule. Gold stops are often several times wider in pips than forex stops. The fixed-lot trader is taking their largest risks on their widest stops, which is exactly backwards. Recalculating takes ten seconds, and the free lot size calculator does it from the signal's own entry and stop.

A month at 1%

Our replayed month held three full stops in 79 signals, which is a good month. Plan your sizing on a worse one: nine stops at 1% is 9% before the winners, and at 3% it is 27%. What the winners return at the same sizing is a per-trade sum, and the results page guide shows how to do it. None of that says a month with nine stops feels good. Three stops in a week at 1% feels bad; at 3% it feels like the end. Size so that the bad week is a number and not a feeling.

Copier settings

The copier sizes trades for you in one of two modes: a fixed lot for every signal, or Risk %, which applies this formula on every signal using the signal's own stop. The Risk % default is 2.0; set it to the number you chose above before the first signal. The parameters guide explains both settings. Whichever you use, the arithmetic above is what the setting is doing on your behalf; check it once by hand so you know what a full stop will cost before the first one arrives.