🚨 CRITICAL WARNING
Position sizing is THE MOST IMPORTANT aspect of trading. Even with 70% win rate, poor position sizing WILL destroy your account. Read this tutorial carefully - it could save you thousands of dollars!
1. Why Position Sizing Matters
Position sizing determines how much you risk on each trade. Get this wrong, and nothing else matters.
Real Example: Two Traders
❌ Trader A - Good Signals, Bad Position Sizing
- Win Rate: 70% (excellent!)
- Risk per trade: 10%
- After 3 losses in a row: -30% account
- Needs: +43% to break even
- Result: One bad week = account blown 💥
✅ Trader B - Good Signals, Proper Position Sizing
- Win Rate: 70% (same as Trader A)
- Risk per trade: 2%
- After 3 losses in a row: -6% account
- Needs: +6.4% to break even
- Result: Can survive 50 losses before account blown ✅
The difference: Trader B survives and profits. Trader A is broke.
Key Principles
✅ Principle 1: Preserve Capital at All Costs
- You need money to make money
- One big loss can wipe out months of gains
- Recovery from large drawdowns is exponentially harder
✅ Principle 2: Consistent Sizing Beats Optimization
- Don't risk more on "high confidence" trades
- Every trade has risk of failure
- Consistency = predictable results
✅ Principle 3: Small Losses, Big Wins
- Risking 1-2% per trade is sustainable
- Allows for long losing streaks
- Gives strategy time to work
2. The 1-2% Rule
⚠️ THE GOLDEN RULE
Never risk more than 1-2% of your account on a single trade.
Why 1-2%? Mathematical Proof
With 2% risk per trade:
- 10 losses in a row = -18.3% drawdown
- 20 losses in a row = -33% drawdown
- 50 losses in a row = -63.6% drawdown
With 10% risk per trade:
- 10 losses in a row = account blown (-100%)
- Game over, no recovery possible
Determining YOUR Risk Percentage
1% Risk - Ultra Conservative
- Best for: Beginners, highly volatile markets
- Pros: Maximum safety, can survive 100+ losses
- Cons: Slower growth
- Use when: Learning, testing new strategy, uncertain markets
1.5% Risk - Balanced
- Best for: Intermediate traders, stable strategies
- Pros: Good balance of safety and growth
- Cons: Moderate drawdown in losing streaks
- Use when: Strategy proven, markets normal
2% Risk - Aggressive (But Still Safe)
- Best for: Experienced traders, high win rate systems
- Pros: Faster growth, optimal risk/reward
- Cons: Larger drawdowns possible
- Use when: Confident, strategy thoroughly tested
❌ NEVER GO ABOVE 2%
- 3-5% = Gambling territory
- 10%+ = Account suicide
- No professional trader risks more than 2%
3. Position Size Calculator
The Formula
Position Size = (Account Balance × Risk%) / Stop Loss (in pips)
Step-by-Step Calculation
Example Trade
- Account Balance: $10,000
- Risk Percentage: 2%
- Stop Loss: 30 pips
Step 1: Calculate Risk Amount
Risk Amount = Account × Risk%
Risk Amount = $10,000 × 0.02
Risk Amount = $200
Step 2: Calculate Position Size
Position Size = Risk Amount / Stop Loss
Position Size = $200 / 30 pips
Position Size = $6.67 per pip
Step 3: Convert to Lots (for Forex)
Standard Lot = $10/pip
Mini Lot = $1/pip
Micro Lot = $0.10/pip
$6.67/pip = 0.67 mini lots (or 6.7 micro lots)
Quick Reference Tables
For $1,000 Account (2% risk = $20):
| Stop Loss | Position Size | Lot Size |
|---|---|---|
| 10 pips | $2/pip | 0.20 mini lots |
| 20 pips | $1/pip | 0.10 mini lots |
| 30 pips | $0.67/pip | 0.067 mini lots |
| 50 pips | $0.40/pip | 0.04 mini lots |
| 100 pips | $0.20/pip | 0.02 mini lots |
For $10,000 Account (2% risk = $200):
| Stop Loss | Position Size | Lot Size |
|---|---|---|
| 10 pips | $20/pip | 2.0 mini lots |
| 20 pips | $10/pip | 1.0 mini lots |
| 30 pips | $6.67/pip | 0.67 mini lots |
| 50 pips | $4/pip | 0.40 mini lots |
| 100 pips | $2/pip | 0.20 mini lots |
💡 Online Calculators
Recommended tools:
- Myfxbook Position Size Calculator - myfxbook.com/position-size-calculator
- BabyPips Calculator - babypips.com/tools/position-size-calculator
- GAIN OPTIMIZER Built-in - Dashboard → Risk Calculator
4. Advanced Sizing Methods
Fixed Fractional (What We Teach)
Method: Risk same % on every trade
Pros:
- Simple to understand
- Easy to implement
- Consistent results
Best for: Beginners, consistent strategies
Kelly Criterion (Advanced)
Kelly % = (Win Rate × Avg Win) - ((1 - Win Rate) × Avg Loss) / Avg Win
Example:
Win Rate: 60%
Average Win: $200
Average Loss: $100
Kelly = (0.6 × 200) - (0.4 × 100) / 200
Kelly = (120 - 40) / 200
Kelly = 0.4 = 40%
⚠️ Kelly is TOO Aggressive!
40% is way too high. Use Quarter Kelly instead:
Quarter Kelly = 40% / 4 = 10%
Still too high for most traders! Stick with 1-2%.
5. Dynamic Position Sizing
Based on Signal Confidence (NOT Recommended for Beginners)
| Confluence Score | Risk % |
|---|---|
| 85+ | 2% |
| 75-84 | 1.5% |
| 70-74 | 1% |
| Below 70 | Don't trade |
Based on Account Performance
- After 5 wins: Reduce to 1.5% (lock in profits)
- After 5 losses: Reduce to 1% or take break
- Drawdown -10%: Reduce to 1% immediately
Common Mistakes to AVOID
❌ Mistake #1: Risking Too Much
"I'm confident, I'll risk 5%"
Result: One bad day = -20% account
Solution: NEVER exceed 2% per trade
❌ Mistake #2: Not Calculating Every Trade
"I'll just use 0.1 lots on everything"
Result: Sometimes risking 1%, sometimes 10%
Solution: Calculate every single trade
❌ Mistake #3: Increasing Size After Wins
"3 wins in a row, time to risk more!"
Result: Next trade loses, gives back all profits
Solution: Keep size consistent
10 Golden Rules
📋 Position Sizing Rules (Copy These!)
- Rule 1: Never risk more than 2% per trade
- Rule 2: Calculate position size BEFORE entering
- Rule 3: Use calculator (don't estimate)
- Rule 4: Account for correlated positions
- Rule 5: Don't increase size after wins
- Rule 6: Reduce size after 3+ losses
- Rule 7: Maximum 3 positions open (6% total risk)
- Rule 8: Stop trading if down 10% in one day
- Rule 9: Review sizing monthly, adjust quarterly
- Rule 10: When in doubt, size DOWN not up
Position Sizing Worksheet
POSITION SIZING CALCULATION
Account Balance: $________
Risk Percentage: _____% (1-2%)
Risk Amount: $________
Entry Price: ________
Stop Loss: ________
Distance (pips): ________
Position Size = Risk Amount / Stop Distance = ________
Lot Size: ________ lots
VERIFY CHECKLIST:
□ Risk is 1-2% of account
□ Stop loss is logical (not random)
□ Position size calculated correctly
□ No other correlated positions
□ Broker allows this lot size
□ Ready to execute trade
What You've Learned
🎓 You Now Know:
- ✅ Why position sizing is THE most critical skill
- ✅ The 1-2% rule and mathematical proof
- ✅ How to calculate position size step-by-step
- ✅ Quick reference tables for different accounts
- ✅ Advanced sizing methods (Kelly, Optimal F)
- ✅ Dynamic sizing strategies
- ✅ Common mistakes and how to avoid them
- ✅ 10 golden rules for position sizing
⚠️ Final Warning
More traders lose money from poor position sizing than from bad strategies. Master this before anything else!