Before a currency trade, set how much of your account you will risk, where the trade is wrong, and what the broker and costs add. Position size follows from those, never from the maximum leverage available.
12 min read · Level 5
Position sizing is the only part of short-term currency trading that I think reliably helps an individual, and even then only by slowing losses rather than creating gains. Most people approach it backwards - deciding how much they want to make and working out the size - which is how accounts disappear. Starting from the loss you will accept is less exciting and far more survivable.
A disciplined evaluation of one currency trade has six parts:
1 Account risk the most you will lose, as a share of your account 2 Invalidation the price at which your idea is wrong, and so the stop 3 Position size derived from 1 and 2 4 Costs spread, commissions and rollover over the expected holding time 5 Gap risk whether the price could jump past your stop 6 Broker authorisation, client money protection and counterparty
Position sizing from risk, with an account of 10,000 dollars:
Maximum risk: 1% of account 100 dollars Stop distance 50 pips Dollars per pip allowed 100 / 50 = 2 Position size 2 / 10 per standard lot = 0.2 lots Units 20,000
At 0.2 lots, the leverage used is far below the broker's maximum. That is the point: the maximum leverage available has nothing to do with how much you should use.
A stop-loss order is not a guarantee. In fast markets or over weekends the price can gap past it and fill worse, which is slippage.
Because most retail forex losses come from position sizes that make ordinary moves catastrophic. Traders often size from the margin they have, using most of the available leverage, and a normal day's move then does the damage.
Broker checks matter too. With many retail products the broker is your counterparty; if it is poorly regulated or fails, your money can be at risk regardless of your trades.
This is educational information, not investment, securities or financial advice. Rules differ by country and change — get advice from a qualified professional in your jurisdiction before acting.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Sources: UK FCA - information for consumers; U.S. CFTC - Commodity Futures Trading Commission; FINRA - investor information
Two traders, same idea, same 10,000 account, same 50-pip stop.
Trader Size Loss if stopped Share of account A 0.2 lots 100 dollars 1% B 2.0 lots 1,000 dollars 10%
Both are wrong three times in a row. Trader A has lost about 3% and can keep going. Trader B has lost about 30% - and if the price gapped past the stop on one of those trades, more.
Trader B's broker allowed the larger position. That did not make it a reasonable one.
Choosing position size based on available margin or maximum leverage. Size should come from the amount you are willing to lose and where your trade is proven wrong.
Choose a small fixed share of your account you would lose if wrong, and do not change it because you feel confident.
Decide what price would show the trade is wrong, not a distance chosen to fit a desired position size.
Divide the risk amount by the stop distance in pips to get money per pip, then convert to lots.
Include spread, commissions and rollover, and ask whether the trade will be held over a weekend or major announcement.
Check authorisation on the regulator's register and what protection applies to client money.
Before opening any currency position.
Do not use position sizing as a reason to believe a strategy will be profitable. It controls how much you lose when wrong; it does not make you right more often.
After the January 2015 Swiss franc move, some retail forex clients ended with negative account balances, owing their brokers more than they had deposited because prices jumped past their stops. Subsequently, UK and EU regulators introduced negative balance protection for retail clients trading CFDs.
Check whether negative balance protection applies to your account. Without it, a large gap can create a debt, not just a loss.
Create a free account to read the rest and apply it to your own investing.