What is the Position Size Calculator and How to use it?

Position size calculators are handy tools for traders to quickly calculate their position sizing according to risk management. It can greatly assist traders in calculating exactly how many lots they can use to ensure they are not exposed to excessive risks. To use it traders need to know their risk appetite and other details. In this guide, we will explain what these calculators are, how they work, and how traders can employ them to ensure accurate position sizing and increase their trading accuracy.

Position size explained

To determine why position sizing is this critical, we can just remember the case of a Reddit trader who lost 24k in meme stocks. The reason was he was not using the correct position size and got exposed to unnecessary risks. Position size decides how much you risk per trade in lots. If too big a position size is selected, blowing up an account becomes a matter of time. Too small an opposition, on the other hand, can cause traders to miss opportunities. The position size calculator removes the guesswork and enables even beginners to determine position size with great accuracy.

What is a position size calculator?

The position size calculator is a tool that tells you how much to invest according to the:

• Your account balance
• Risk tolerance (how much you can risk per trade in percentage, e.g., 1%)
• Stop-loss distance (how far you can let the losing trade go in pips)

This makes it super easy and organized to determine how many lots to select; no PhD is required. A trader just inputs numbers and gets answers. The position size calculator is an important tool as it promotes responsible trading by forcing traders to have risk per trade, stop loss, and other elements of their strategies very well-defined.

Ky terms explained

Before you apply for a position size calculator, you need to know several critical terms. Here are some of them listed and explained:

• Stop-loss – Price where you will admit defeat and close the losing position.
• Risk per trade – Maximum percentage of your account you will lose on one single trade (1%, 2%, 5%?).
• Pip(s) – Pip is the smallest price unit after points. (1 lot typically equals to 10 USD)
• Lot – Standard units. 1 standard lot is 100,000 units of currency. For example, 1 lot = $10 per pip).

Knowing these terms and understanding their importance is key in trading and the position sizing calculator requires traders to know all of them.

How to calculate position size manually?

It is always useful to apply tools and indicators but knowing how to do it manually is equally as important not to use any tools blindly. To calculate position size, traders can use a simple formula.

Formula

Position Size = (Account Risks) / (Stop-loss Distance)

Let’s take a look at a simple example:

• Account: $1,000
• Risk per trade: 1% ($10)
• Stop-loss: 10 pips
• Position size = 100/50 pips = 2 per pip = 0.2 lots in Forex.

As we can see, calculating your own position size is relatively easy and includes simple steps. Knowing how you calculate it is important so that when the tool makes an error or you make an error when entering your numbers, you will notice something is off and quickly correct it. Beginners can use this tool to define their risks clearly and accurately and determine their position size.

Position size formulas

There are several methods to calculate your position size. Traders can either use the fixed risk method or the percentage risk method depending on their needs and differences.

Fixed risk method

The fixed risk method involves risking the same amount on each trade no matter how markets move and stop-loss pips. For example, risking 100 USD per trade, no matter what. It is a very simple method but ignores volatility.

Percentage risk method

The percentage method is also simple and traders usually risk a certain percentage of their account on each trade. For example, risking 1% of the account per trade. This method is useful because it adjusts as your account grows and ensures lot size is always following the account size, which is a better approach.

A step-by-step guide to using a position size calculator

Here are steps to effectively use the position size calculator:

1. Open the tool (you can access it on our website for free)
2. Enter:

• Account balance (what is your account balance?)
• Risk (how much percentage do you want to risk per trade? Example: 1%)
• Stop-loss (how many pips)
• Currency pair (EUR/USD, XAU/USD, etc.)

1. Click on “Calculate”

You will get lots of results and then can use this lot size in your trading.

Common mistakes

Beginner traders often make mistakes and those mistakes are generally similar. Since trading requires strong strict management and an understanding of financial markets, we can easily list common mistakes.

Taking excessive risks

Beginners often risk 5% or more on their trades, which is a huge mistake. Every trading strategy experiences losses and when risking too much it is easy to lose a considerable percentage of a trading account.

Ignoring risk management

Many beginners forget the golden rules of financial trading: Always use stop-loss no matter what. This is because markets can get volatile due to random reasons and trading without stop-loss can easily end in large losses.

Overcomplicating

Traders often jump from one strategy to another, never too sick to one strategy. This is why beginners should try to employ one working method and stick to it.

Real examples

Depending on the trading asset traders might need to use slightly different lot sizes. Let’s overview the most popular asset classes and examples to see clearly how to employ correct position sizing.

Stock trading

Stock trading involves buying and selling shares in major companies. However, it is different from Forex as sock trading has much lower leverage (1:5 max) and traders usually need to have larger account sizes. So, we will pick 20,000 USD as a starting balance.

Here is an example for Apple stock:

• Account: $20,000
• Risk: 1% ($200)
• Stop-loss: $10 below entry
• Shares to buy: 200/10 = 20 shares

Crypto

Cryptos can be traded with an even smaller budget. Let’s pick Bitcoin as an example:

• Account – $5,000
• Risk – 2% ($100)
• Stop-loss – $500 below entry
• Position size = 100 / 500 = 0.2 BTC.

Cryptos usually have 1:2 and even 1:5 leverage and some DeFi platforms allow even higher leverage using futures.

Psychology: why do traders skip math?

Now, many beginners fall victim to psychological mistakes and often overlook the importance of calculating your position size and risk per trade. Some of them think they can even handle bigger risks only to blow up their account shortly after. We should admit that some traders might also be lazy and won’t dedicate 30 seconds to calculating their position and risk size. However, the availability of a position size calculator can counter those risks and enable traders to calculate how much they should risk in seconds.

FAQs on What is the Position Size Calculator and How to use it?

Is position sizing only for professionals?

Professional traders usually have very well-defined strategies and risk management, so beginners need it most.

Can I risk 2% instead of 1%?

Yes, it all depends on the trading strategy and its win rate and other key factors. Ensure to use a position size calculator and see whether your account can risk 2% on each trade.