The formula
Lot size = risk amount ÷ (stop distance × pip value per lot)
Where risk amount = capital × risk percentage. The formula is simple, but its power is that it holds your loss constant however the stop distance varies between trades.
Worked examples across account sizes
Assuming a $10 pip value per standard lot and 1% risk:
| Capital | Risk amount | Stop | Lot size |
|---|---|---|---|
| $500 | $5 | 100 pips | 0.005 |
| $1,000 | $10 | 100 pips | 0.01 |
| $5,000 | $50 | 100 pips | 0.05 |
| $1,000 | $10 | 50 pips | 0.02 |
Note the last two rows: same account, same risk, yet the tighter stop permits double the size. That is the core relationship between stop and size.
Common sizing errors
- A fixed lot for every trade: makes your risk swing randomly as the stop distance changes.
- Assuming pip value: gold contract specs differ between brokers — verify before calculating.
- Not updating capital: 1% of $1,000 is not 1% of $700 after a losing streak. Always compute on the current balance.
- Ignoring volatility: a volatile market needs a wider stop, hence a smaller size — see gold volatility.