Risk Management
Position Sizing
Definition
Determining how large a trade position to take based on account size, risk tolerance, and the distance to your stop-loss.
How It Works
Position sizing answers the question: "How many lots/contracts should I trade?" The standard formula is: Position Size = (Account Size x Risk %) / (Stop-Loss Distance x Pip Value). For example, risking 1% on a $100K account ($1,000 risk) with a 50-pip stop-loss and $10/pip value = 2 lots.
Proper position sizing ensures that no single losing trade can significantly damage your account. In prop trading, it's the primary tool for staying within drawdown limits.
Many prop firms also impose maximum lot size limits based on account size.
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