Why size is the decision, not the afterthought
Two traders take exactly the same twenty trades — same entries, same exits, same order, same everything. One ends the month up. The other is down and has stopped trading. The only difference between them is how many shares, lots or contracts they put on each time.
This is not a trick of arithmetic. It is the whole game. Your entry signal decides whether a trade is more likely to win than lose; your position size decides how much that distinction is allowed to matter, and whether a run of losses — which is a certainty, not a risk — leaves you with enough capital to keep taking the trades that eventually work. Edge tells you the direction of the drift. Size tells you whether you survive the noise around it.
Most people do it backwards. They decide to buy "a couple of lots" or "about five grand's worth", place the stop wherever the chart suggests, and only afterwards notice what that combination actually risks. Sometimes it is 0.4% of the account. Sometimes it is 9%. The number moves around at random, which means the loss that eventually hurts is arbitrary rather than chosen.
Fixed-fractional sizing inverts that. You decide the loss first — a fixed percentage of the account, the same on every trade — and then solve for the size that produces exactly that loss if the stop is hit. Size becomes an output. It stops being something you feel and becomes something you compute.
The formula, and why it is only ever one formula
Every position-sizing calculation you will ever do, in any market, is this:
size = risk amount ÷ (stop distance × value per unit)
Three inputs, and they do not change between asset classes:
- Risk amount — the money you accept losing on this trade. If you risk a fixed 1% of a £25,000 account, that is £250. Not "about £250": £250.
- Stop distance — how far the price has to move against you before you are out, measured from your entry to your stop. In pips, in points, in cents, in ticks; the unit does not matter as long as it matches the next input.
- Value per unit — what one unit of that stop distance costs you, per unit of position. One pip on one standard lot. One cent on one share. One tick on one contract.
Multiply the last two and you get "the money I lose per unit of position if I am stopped". Divide the risk amount by that, and you have the position size. That is the entire method. Everything that looks complicated about sizing — and there is a small industry built on making it look complicated — is really just the question of what "value per unit" is in the instrument in front of you.
The formula is not the difficult part and never was. Value per unit is the difficult part, and it is difficult in a boring, clerical way rather than a conceptual one: it is a contract specification you have to look up, not an idea you have to understand.
The only hard part: value per unit
Here is what the third input actually is in each market.
| Market | Position unit | Stop measured in | Value per unit |
|---|---|---|---|
| Stocks | 1 share | Currency per share | 1.00 — a $1 move on one share is $1. This is the easy case. |
| Forex | 1 standard lot (100,000 units) | Pips | Depends on the quote currency and your account currency. Roughly $10 per pip when the quote currency is USD and your account is in USD. |
| Futures | 1 contract | Ticks | Fixed by the exchange. Published in the contract spec — e.g. $12.50 per tick on ES, $5.00 on MES. |
| Crypto (spot) | 1 coin | Currency per coin | 1.00, same as a share. Fractional sizes are normal, which makes the arithmetic tidier, not harder. |
| CFDs | 1 "contract" as your broker defines it | Points | Whatever your broker says. This varies between brokers on the same underlying, so read the specification rather than assuming. |
Two of those rows are trivial. Shares and spot crypto have a value per unit of exactly 1.00, because the instrument is priced in the currency you are counting in. A $2.40 stop on a share costs you $2.40 per share, and the formula collapses to risk ÷ stop distance.
Futures are nearly as easy, because the exchange fixes the tick value and publishes it. You are not calculating anything; you are looking it up once and reusing it forever.
Forex is the one that trips people, and only because of currency conversion. A pip on a standard lot is worth 10 units of the quote currency — the second one in the pair. On EUR/USD that is 10 US dollars. On EUR/GBP it is 10 pounds. If your account is denominated in something else, you have to convert that back at the current rate before it means anything to your balance. Get that conversion wrong and every trade in that pair is mis-sized by the same factor, quietly, until you notice.
Worked example: a forex trade
Long EUR/USD, GBP account
Account: £25,000. Risk per trade: 1%, so £250. Entry 1.0840, stop 1.0805 — a 35 pip stop. GBP/USD is trading at 1.2700.
Value per pip per standard lot, in USD: $10. Convert to the account currency: $10 ÷ 1.2700 = £7.87 per pip, per lot.
size = 250 ÷ (35 × 7.87) size = 250 ÷ 275.45 size = 0.91 lots
So 0.91 standard lots — call it 0.9 after rounding down to what the broker accepts. Stopped out, that loses 35 × 7.87 × 0.9 = £247.90, which is the £250 you decided on before you looked at the chart.
Notice what happens if you skip the conversion and treat the pip as worth £10 instead of £7.87. You would size 0.71 lots and risk only £196 — a 22% under-allocation on every single GBP-account trade in a USD-quoted pair. Not catastrophic, but it quietly makes your good months smaller than they should have been.
Worked example: a stock trade
Long a $58 stock
Account: $40,000. Risk per trade: 0.75%, so $300. Entry $58.20, stop $55.90 — a $2.30 stop.
size = 300 ÷ (2.30 × 1.00) size = 130 shares
130 shares at $58.20 is $7,566 of exposure — about 19% of the account. That is the part people find counter-intuitive: risking 0.75% required committing nearly a fifth of the account, because the stop was tight. Position size and position risk are different quantities and they are not proportional to each other.
Widen the stop to $52.20 (a $6.00 stop) and the same $300 risk gives you 50 shares — $2,910 of exposure, 7% of the account. Same risk, less than half the capital committed. The stop distance is doing the work.
A tight stop on a large position can demand more capital than you have, or more leverage than you are comfortable with, while still showing a small risk percentage. The risk number being fine does not mean the exposure number is fine. Look at both.
Worked example: a futures trade
Short one E-mini S&P (ES)
Account: $30,000. Risk per trade: 1%, so $300. ES moves in 0.25-point ticks worth $12.50 each, so a full point is $50. Entry 5,412.00, stop 5,420.00 — an 8 point stop, which is 32 ticks.
size = 300 ÷ (32 × 12.50) size = 300 ÷ 400 size = 0.75 contracts
You cannot trade three-quarters of an ES contract. This is the situation the arithmetic most often lands you in, and there are exactly three honest responses: trade the Micro (MES, at $1.25 per tick, giving 7.5 → 7 contracts and a $280 risk), tighten the stop if and only if there is a real level to put it behind, or skip the trade.
The dishonest response is to round 0.75 up to 1 and tell yourself it is close enough. It is a 33% overshoot on your stated risk, and it is the trade you will be tempted to round up on precisely when you are most confident — which is not when you are most right.
The stop is an input, not a plug
There is a failure mode this formula makes very easy, and it is worth naming because it looks like discipline while being the opposite.
You want a bigger position. The formula will not give you one. So you move the stop closer, the arithmetic obliges, and now you have the size you wanted while the risk figure still reads 1%. Technically nothing has been violated. In practice you have replaced a stop that was placed where the trade idea would be proven wrong with a stop placed where your preferred size required it to be — which means it will now be hit by ordinary noise, on trades that would otherwise have worked.
The stop belongs to the analysis. It goes below the structure, outside the range, past the level — wherever the thing that would tell you the idea was wrong actually lives. Then the sizing formula runs on it. If the answer is a size too small to be worth the effort, the honest conclusion is that this particular trade, with this particular stop, does not suit this account. That is a real answer and it is allowed to be the answer.
The related question — what percentage to risk in the first place — is a separate one, and it deserves more than a rule of thumb. It is covered in risk of ruin.
Where this method stops working
Fixed-fractional sizing is the right default. It is not universally correct, and these are the specific places it misleads.
- It assumes you get your stop price. You often do not. A gap through your level on an overnight hold, a halt, or a fast move in thin liquidity all fill you worse than planned, sometimes far worse. Your 1% risk is a 1% risk under normal conditions and an unknown under abnormal ones — which are exactly the conditions in which large losses happen.
- It sizes each trade as if it were alone. Four separate 1% positions in four different technology stocks are not four independent 1% risks; on a bad day for the sector they behave like one 4% risk. Correlation is invisible to this formula. Beta-weighting is one way to see the aggregate.
- It ignores costs. Spread, commission and swap or financing are not in the formula. On short holds and tight stops they are a material fraction of the risk, and they always take from the same direction.
- It says nothing about whether the trade is good. Sizing correctly on a strategy with no edge produces a slower, more orderly decline. It buys time, not profitability. That is worth having — time is what lets you find out whether an edge is real — but it is not a substitute for one.
What it does do is make your losses a decision rather than an accident. Over a few hundred trades that is the difference between a drawdown you planned for and one you did not survive.