There is a version of sizing that most traders start with: decide how confident you feel, then pick a lot size that matches the feeling. It fails because confidence is not a quantity and because the market does not consult it.
The alternative runs in the opposite direction. You start from the loss you are willing to accept on this trade, and let arithmetic tell you the size.
The calculation
- Fix the risk per tradeA percentage of account equity — commonly between 0.5% and 2%. On a €10,000 account at 1%, that is €100.
- Find the stop distanceWhere does this idea stop being valid? Measure that in pips from your entry. Say 40 pips.
- DivideRisk ÷ (stop distance × pip value). With a €10 pip value per lot: €100 ÷ (40 × €10) = 0.25 lots.
- Place the order at that sizeNot the size that feels right. The size the arithmetic returned.
Why this order matters
Sizing first and placing the stop afterwards produces stops set where the loss is tolerable rather than where the idea is invalidated. Those stops get hit by ordinary noise, and the trader concludes the strategy does not work when in fact the stop was never given room to be wrong.
The survival arithmetic
| Risk per trade | Losses to halve the account | Recovery needed |
|---|---|---|
| 1% | 69 consecutive | 100% |
| 2% | 35 consecutive | 100% |
| 5% | 14 consecutive | 100% |
| 10% | 7 consecutive | 100% |
Seven bad trades is an ordinary month. At 10% risk that month ends the account; at 1% it is a rough patch you trade through. Nothing about your market view changed between those two columns — only the size.