Position Sizing and Your First Trading Plan
Combine a monetary risk limit, stop distance, and written rules into a basic plan that can be tested and reviewed.
Learning objectives
- Calculate a maximum monetary risk amount
- Describe the inputs required for position sizing
- Draft entry, exit, risk, and review rules
Position sizing converts a trading idea into controlled account exposure. The calculation begins with the amount you are prepared to lose if the idea is invalidated—not with the amount you hope to make.
The calculation sequence
- Risk amount: account balance multiplied by the chosen risk percentage.
- Stop distance: the distance between entry and the price that invalidates the setup.
- Pip or point value: the monetary value of movement for the instrument and position unit.
- Position size: the size that keeps the loss near the risk amount if the stop executes as planned.
In simplified form:
position size = risk amount / (stop distance × value per unit of movement)
Instrument specifications, account currency, conversion rates, spread, commission, and slippage can affect the result. Verify the output with a trusted calculator and the broker’s contract details.
Your first plan
A basic trading plan should answer:
- Which instruments and sessions will I observe?
- What market condition must exist before I consider an entry?
- What exactly triggers entry?
- Where is the idea invalidated?
- How will position size be calculated?
- What is the maximum risk per trade and per day?
- When will I stop trading?
- What evidence will I save for review?
Rules should be specific enough that you can later judge whether they were followed. “Enter when it looks strong” is difficult to test. “Enter only after the defined level is reclaimed and the candle closes” is more observable, though it still requires historical testing.
Judge process before outcome
A valid trade can lose and an impulsive trade can win. If review focuses only on money, accidental behaviour may be rewarded. Track rule adherence, setup quality, execution, and emotional state alongside the result.
Practice
Draft a one-page plan for a demo-only setup. Calculate three hypothetical position sizes using different stop distances while keeping the same monetary risk. Review the plan after at least twenty historical or demo examples before considering changes.
Key takeaway
A trading plan connects analysis to controlled action. Position size makes the risk measurable, while written rules make the decision reviewable.
Education only: This course is general education, not financial advice or a promise of trading returns. Trading leveraged products can result in substantial losses.
Checking saved progress...