Position sizing turns a trading idea into a financial commitment. It determines how many shares, contracts or currency units you trade, and how much a failed trade could cost. A trading risk budget sets the wider boundaries: how much capital you can expose, how much planned loss you will accept on one idea, and when you stop taking new risk.
For speculative trading, start with the loss you can tolerate, not the profit you want. Work backwards from that amount to a position size. The examples below use hypothetical figures in pounds; they illustrate a process, not recommended risk levels or investments.
Separate Trading Capital From Your Loss Budget
Your account balance is not automatically an amount you can afford to lose. Before sizing trades, decide how much money can be committed without affecting household bills, debt repayments, emergency savings or other financial commitments. Exclude money you expect to need soon.
Then set two different boundaries. The first is the capital allocated to trading. The second is the cumulative loss at which you will stop and reassess. An account containing £10,000 might have a £1,000 review threshold, for example. That does not make the remaining £9,000 safe; it creates an earlier decision point.
Write down whether that threshold is measured from starting capital or from the account’s highest value. Also decide how deposits and withdrawals will be treated. Adding £500 after losing £500 should not make the loss disappear from your records.
Choose a risk percentage without treating it as a rule of nature
A percentage risk limit expresses the planned loss on one trade relative to account equity. At 0.5% of £10,000, the budget is £50. At 2%, it is £200. Neither percentage establishes that the trade is suitable.
The familiar 2% threshold is an arbitrary convention, not a proven safe allowance, a distinction made explicitly in CME Group’s discussion of the 2% rule. Choose a ceiling that fits your financial capacity, strategy evidence and tolerance for a sequence of losses. Treat it as permission to risk less, not an obligation to use the full amount.
Calculate Position Size From the Planned Exit
For an instrument whose profit and loss move proportionally with price, the basic calculation is:
Position size = cash risk budget ÷ planned loss per unit.
Before costs, planned loss per unit is the distance between entry and stop multiplied by the cash value of each price increment. Establish the exit level first, then calculate size. CME Group’s position sizing method connects these two inputs: a logical stop location and the amount of account capital at risk.
Do not choose a large position and squeeze the stop closer simply to make the arithmetic fit. That changes the trading setup. If the intended exit produces too much risk at the smallest available size, skip the trade or consider an appropriate smaller denomination.
A worked example including costs
Suppose account equity is £10,000 and the chosen risk ceiling is 0.5%, giving a £50 budget. A hypothetical share trade has an entry price of £20 and a stop at £19.60. The planned price loss is therefore £0.40 per share.
Ignoring costs, £50 divided by £0.40 allows 125 shares. Now assume £4 of fixed transaction costs and a £0.02 per share allowance for adverse execution. These are illustrative inputs, not a quoted fee schedule.
Adjusted size = (£50 − £4) ÷ (£0.40 + £0.02) = 109.52 shares.
If only whole shares are available, round down to 109. The modelled loss is then £49.78: £43.60 of price movement, £2.18 of execution allowance and £4 of costs. Buying the shares would require £2,180 before charges, a separate funding consideration.
Use actual fee rules when applying the formula. Include applicable transaction taxes, financing and currency conversion costs where relevant, and avoid counting a spread twice if it is already reflected in executable entry and exit prices.
Keep the units consistent
| Position | Planned price risk | Calculation with a £60 budget |
|---|---|---|
| Shares | £0.30 per share | £60 ÷ £0.30 = 200 shares |
| Spread bet | 30 points | £60 ÷ 30 = £2 per point |
| Hypothetical futures contract | 12 ticks at £2 per tick | £60 ÷ £24 = 2 contracts after rounding down |
Check the contract multiplier, tick size, minimum order and permitted size increments before submitting an order. A platform’s “one contract” is not a universal unit.
For a sterling account trading a currency pair, convert the estimated loss into pounds before comparing it with the budget. The calculations in pip values and forex position sizes cover that conversion. The simple formula here should not be applied unchanged to options or other positions with nonlinear payoffs.
Distinguish Planned Risk From Possible Loss
The £49.78 example is a planning estimate, not a maximum loss guarantee. If the exit occurs farther from entry than assumed, the loss will be larger. Adding a modest execution allowance makes a budget less optimistic; it does not cover every possible market move.
A stop market order becomes a market order when triggered, so its execution price can differ from the stop price. A stop limit order controls the acceptable execution price but may remain unfilled. These trade-offs are set out in FINRA’s guidance on stop orders during volatile markets, which addresses stock trading.
Alongside the intended exit, run an adverse-execution scenario. For the hypothetical share trade, an exit at £18.80 rather than £19.60 would produce a £130.80 price loss on 109 shares, before charges. That is more than twice the £50 budget. It is a scenario, not a forecast or a worst-case bound.
If such a loss would be unaffordable, reduce size further or do not take the position. In your written plan, identify circumstances that require a fresh assessment, such as holding through a company announcement or keeping a position open while its market is closed.
Set Budgets for Open Positions and the Trading Session
A per-trade limit leaves two questions unanswered: how much can be lost across positions already open, and how much new risk can be added after losses?
Create a separate ceiling for total open risk. For planning purposes, sum the estimated losses from current prices to intended exits, including remaining costs. Track the original entry-based risk as well, but do not confuse it with the amount current equity could still fall.
Consider a hypothetical £10,000 account with a £150 ceiling for total open risk. Two positions each have £50 of estimated remaining downside, leaving £50 of headroom. A third £50 trade fills that allowance. It does not leave room for another trade simply because a different market is available.
Group positions that depend on the same outcome. Buying two equity indices and several shares may create one larger equity-market bet rather than several independent trades. Use a shared budget for related ideas; correlation and hidden concentration across trades deserves its own assessment.
Make the session limit forward-looking
A daily loss limit should govern new orders before the threshold is reached. Suppose the session allowance is £150, realised losses including charges are £80, and open positions have another £40 of estimated downside from current prices. Only £30 remains for new planned risk.
Use one accounting convention consistently. If you measure session loss using current equity, unrealised losses are already included. Add only the further downside from current prices to the intended exits, not the original entry-to-stop loss again.
Decide in advance whether hitting the limit means cancelling new orders, closing positions, or managing existing trades without adding exposure. Include pending entry orders that could fill together. Also specify whether intraday profits increase the allowance; an illustrative conservative policy would leave the original allowance unchanged.
Check Margin Separately From Risk
After calculating size, check whether the account can fund and maintain the position. Do not reverse the process by treating available margin as a suggested trade size.
For illustration, a position with £10,000 of exposure and a 5% margin requirement needs £500 of margin. A 1% adverse move in the underlying exposure represents roughly £100 of price loss for a linear contract. The £500 deposit is neither the planned loss nor a promise that losses stop there.
For UK retail CFDs covered by the rules, the FCA’s CFD protections include margin close-out requirements and negative balance protection. The latter limits liability to funds in the CFD trading account; it does not protect an individual £50 trade budget or prevent the account funds from being lost. These protections should not be assumed for other products, jurisdictions or professional accounts.
Add an independent funding check to the sizing process: after opening the proposed position, would the account retain enough headroom under your adverse-price scenario? If the answer depends on depositing money quickly, reconsider the size before entering.
Recalculate After Losses Without Chasing Recovery
Fixed fractional sizing recalculates the cash allowance as equity changes. At 0.5%, a £10,000 account permits £50 of planned risk; an £8,000 account permits £40. Keeping risk at £50 after that fall would raise it to 0.625% of equity.
This arithmetic reduces the cash amount risked as the account shrinks. It does not repair a failing strategy. A 20% decline still needs a 25% gain to regain the starting value, before further costs or cash flows. The broader implications belong in drawdowns, losing streaks and recovery mathematics.
Set review triggers before trading. An illustrative policy might halve the risk ceiling after a chosen drawdown and pause new trades at a lower equity threshold. Any restart should require a documented review, not just the arrival of Monday.
Do not automatically restore the original position size after depositing money. Separate capital contributions from trading results, and assess whether the reason for the pause has changed. A larger balance alone does not answer that question.
Turn the Budget Into an Order Check
Keep the policy short enough to use before every entry. The aim is to make the permitted size reproducible rather than dependent on how convincing the latest chart looks.
- Capital: confirm the equity figure used for sizing and exclude money earmarked for withdrawal.
- Trade: record entry, intended exit, cash risk ceiling, costs and rounded order size.
- Account: check remaining session allowance, total open risk and related positions.
- Execution: assess an adverse fill and confirm the order’s trigger and execution rules.
- Funding: check margin headroom independently of the loss estimate.
Apply the budget to the whole trading idea. Splitting an order into three entries does not create three new allowances. Before adding to a position, recalculate the combined downside at the intended exit and compare it with all applicable ceilings.
In the trading record, compare planned loss with realised loss after costs. Investigate differences: inaccurate contract values, omitted charges, adverse fills, unplanned additions or exits moved farther away. Change faulty assumptions rather than repeatedly excusing the same discrepancy.
Position sizing controls exposure; it does not establish that a strategy has a positive expected return. Assess trading expectancy and risk of ruin separately. A usable risk budget should leave three things clear before entry: the planned loss, the circumstances that could make it larger, and the point at which no further risk will be taken.