Position Sizing & Lot Size
Quick Definition
The mathematical calculation of contract or lot volume allocated to a trade to ensure risk matches an exact percentage of account equity.
Detailed Explanation
Position sizing converts account balance, predetermined risk percentage (e.g., 1%), and stop-loss distance in pips into an exact lot size. Using static lot sizes without adjusting for stop-loss distance is the leading cause of premature account blowups among retail traders.
Key Trading Rules & Takeaways
- Calculated as: Lot Size = (Account Balance × Risk %) / (Stop Loss Pips × Pip Value).
- Allows consistent dollar risk regardless of instrument volatility.
- Fundamental requirement for passing prop firm evaluations.
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Frequently Asked Questions
What is the recommended risk percentage per trade?
Professional and prop firm traders typically risk between 0.5% and 1.5% of account balance per position.