Position Sizing Cheat Sheet

Position Sizing isn’t random. It’s calculated based on ACCOUNT RISK (AR) and TRADE RISK (TR). A formula controls risk so we know exactly how many stocks, futures contracts, or forex lots to buy on a given trade. There are many ways to calculate position size. Here are a few simple ones:

Fixed % Risk Method

Step 1. Choose an AR% you wish to risk on a trade. 2% or less. 1% or less is preferred.

Step 2. Convert AR% to AR$, based on your account size. 

  • AR1% on a $10,000 account means you can risk/lose up to $100/trade.

Step 3. Determine TR$. This may vary by trade; it’s the difference between the entry and stop loss (SL) price. The SL is the exit point if the price doesn’t move in the expected direction. 

  • Entry at $15, SL at $14.25, means TR$ is $0.75.

POSITION SIZE = AR$ / TR$ = $100 / $0.75 = 133 shares

Fixed $ Allocation Method

Step 1. Choose the maximum number of trades you want to allocate your total capital to. If you choose 5, each trade gets a maximum of 20% of the capital. 4 trades, each gets 25%, and so on.

Step 2. Apply the SL to the trade. AR% should still be under 2%, ideally under 1% of the account.

  • $100K account spread over 5 trades, then $20k goes into each trade. Assume TR% is 7% (difference between entry and SL). 0.07 x $20K = $1400. That’s 1.4% of the $100K account, which is acceptable. If TR% is 15% the AR% risk exposure is too high. 0.15 x $20K = $3,000 or 3% of the account. 
  • Reduce capital allocation ($) until the AR% is below 2%, ideally 1% or below. If TR% is 15%, allocating $10K to it means overall account risk is now down to 1.5%, which is acceptable.

POSITION SIZE = Capital allocation ($) / purchase price

  • Assume $65 entry and $20K allocation = $20k / $65 = 307 shares

Using leverage? Use total buying power (TBP) not total capital. $100K x 2x leverage = $200K TBP.

Forex or Futures Sizing

Utilize the Fixed % Risk Method. Establish your AR% and covert to AR$. Determine the TR in pips or ticks/points and know the pip/tick/point value.
Assume $15,000 USD account. AR% is 1% (can lose up to $150), buying EURUSD at 1.1510 with an SL at 1.1498 (12 pips risk). Pip value is $10/standard lot.

POSITION SIZING = AR% / (TRpips x Pip Value)

  • $150 / (12pips x $10) = 1.25 standard lots. It’s standard lots because we used standard lots in the equation. Use micro lots ($1) for the position size in micro lots. This position size requires 10:1 leverage (1.25 lots is €125, with only $15K in the account.
error: Content is protected !!