Building a Foundation
Technical Analysis and Price Action
Keys to Success

Position Size and Percentage Risk

What is position size and how much of your capital should you be risking?

What is position size?

Position size is the number of units in a market. This term is interchangeable with “lot size”. Each market has a lot size associated with it, and the minimum lot size varies dependent on the market.

The Forex markets have a minimum lot size (also called ‘volume’ on XTB) of 0.01 (one hundredth of a ‘lot’). Some other markets, like Bitcoin, have minimum lot sizes of 0.10 (one tenth of a ‘lot’).

When trading with brokers similar to ours, you adjust the position size to adjust your percentage risk.

What is percentage risk?

Percentage risk is the amount of your total account size (in percentage form), that you are risking on a trade. This is the percent of your account you would lose if your stop loss is hit.

E.g If you risk 5% on a trade, with a total account size of £1000, you would stand to lose £20 if your stop loss is hit.

We recommend:

  1. Trade with a consistent percentage risk.
  2. Set your percentage risk below 5% (we usually trade 2%).

Percentage risk is directly linked to position size. This is because your stop loss should be set at a defined level, and you then modify the position size so that your percentage risk matches your personal risk level (as shown in the video).

There is a trade-off between your risk percentage and the expected drawdown. (Drawdown = the amount that an account is below its highest point. E.g A £1000 account that drops to £500 before returning to £900 has gone to 50% drawdown before climbing back to 10% drawdown.)

A higher risk percentage per trade would give larger returns (more profit). This sounds good, but looking at the chart below you can see that the drawdown also increases. This chart is made from data on our back-tested swing trading system, but serves as a general example.

Chart to show the relationship between drawdown and position size

In the end, the percentage risk you choose depends on your personal risk appetite. You have to ask yourself how much drawdown can I withstand? If you trade our system with 5% risk then it’s likely you will have a period of time when your account is 70% down from its highest value. In comparison, trading 2% risk on our system sees maximum drawdown less than 50%, which is much easier to deal with emotionally.