Calculating how many lots to trade so that a stop-loss represents an acceptable fraction of account equity.
A common rule is to risk no more than 1–2% of account equity per trade. Position size is derived by dividing that dollar risk by the stop-loss distance in pip value. For example, risking USD 100 with a 20-pip stop on EUR/USD (USD 10/pip per standard lot) gives a position of 0.5 standard lots.
Consistent position sizing is arguably the most important mechanical discipline in trading, more impactful than entry or exit timing.
Worked Example
Account: $10,000. Risk per trade: 1% = $100. Stop-loss: 25 pips. EUR/USD pip value per standard lot: $10. Lots = $100 ÷ (25 × $10) = 0.4 lots. Check: 0.4 × $10 × 25 = $100. ✓ If equity grows to $12,000, the same 1% rule gives $120 risk, allowing 0.48 lots - position size scales automatically with account growth.