Position sizing is the single most important risk management skill in trading, and it's the one that most new traders either skip entirely or get wrong. They pick a lot size that 'feels right' or use the same size on every trade regardless of their stop distance. Both approaches lead to the same place eventually: a blown account.

The 1-2% Rule

The foundational principle is simple: never risk more than 1-2% of your account on any single trade. If your account is £5,000 and you risk 1% per trade, your maximum loss on any trade is £50. If you risk 2%, it's £100.

This might sound small, and that's the point. A 1% risk means you can lose 20 trades in a row — a truly terrible run — and still have 82% of your account left. A 10% risk means five consecutive losses wipe out nearly half your capital, and the psychological damage of that drawdown usually leads to revenge trading and further losses.

The percentage you choose is less important than being consistent with it. Pick 1% or 2%, commit to it, and calculate it properly on every single trade.

The Calculation

Here's the formula, step by step. Say your account is £5,000, you're risking 1% per trade, and your stop loss is 30 pips on a EUR/USD trade.

First, calculate your risk in pounds: £5,000 × 0.01 = £50. That's the maximum you're willing to lose on this trade.

Second, determine the value per pip at your position size. For a standard lot (100,000 units) on EUR/USD, one pip is approximately £7.60 (this varies slightly with the exchange rate). For a mini lot (10,000 units), it's approximately £0.76. For a micro lot (1,000 units), it's approximately £0.076.

Third, divide your risk amount by your stop distance in pips: £50 ÷ 30 pips = £1.67 per pip needed. Since a mini lot gives you approximately £0.76 per pip, you'd trade roughly 2 mini lots (£1.52 per pip) to stay within your risk. Going to 3 mini lots would put you at £2.28 per pip, which would mean a 30-pip stop loss costs you £68.40 — over your £50 limit.

Why Stop Distance Changes Everything

This is the part most traders miss. Your position size must change based on where your stop loss is. A trade with a 15-pip stop allows a larger position than a trade with a 50-pip stop, because the risk per trade stays the same.

This means you should never decide your position size first and then figure out your stop. You decide your stop based on the chart — where does the trade idea become invalid? — and then calculate the position size that keeps your risk at 1-2%.

If the correct position size based on your stop distance is smaller than you'd like, that's fine. The trade is what it is. Making it bigger to satisfy your desire for larger profits is the single fastest way to blow an account.

Making It Practical

Most brokers and charting platforms have position size calculators built in. Use them. If yours doesn't, there are free online calculators — search for 'forex position size calculator' and you'll find several reliable ones. Enter your account size, risk percentage, stop loss in pips, and the currency pair, and it tells you the correct lot size.

The goal is to make this calculation automatic. Before every trade: what's my account balance, what's my risk percentage, what's my stop distance, what's my lot size? If you do this consistently, you're managing risk properly. Everything else — your entry, your target, your analysis — is secondary to this.