L1.2 — Calculating Position Size from Stop Distance

Position sizing starts with the stop, not the entry. The sequence is: (1) identify the structurally correct stop level, (2) calculate the distance in pips or points from entry to stop, (3) determine the monetary value of one pip/point for the instrument, (4) divide your risk amount by the pip value times the stop distance. The result is your correct lot size.

For example: account equity $5,000, risk percentage 1%, stop distance 20 pips on EURUSD. Risk amount = $50. Value per pip on 1 standard lot = $10. Lots = $50 / (20 pips x $10) = 0.25 lots. This is the only correct position size for this trade at this risk level — not more, not less.

The most common error is working backwards: deciding how many lots to trade first and then choosing a stop that fits. This approach decouples the stop from structure and produces stops that are either too tight (frequent stop-outs) or so wide they are never triggered until the loss is enormous. Always derive position size from the stop. Never derive the stop from the position size.