Lesson 5 of 10 · 7 min

Orders, stop loss and position size

How to turn "I'll risk 1%" into an actual number of lots or contracts, and the four order types you need. Also: what leverage really is.

Lesson 4 gave you a percentage. This lesson turns it into the number you type into the box.

The four orders

Market order — buy or sell now, at whatever price is available. Fast, certain to execute, uncertain on price.
Limit order — buy or sell only at a specified price or better. Certain on price, uncertain on whether it executes at all.
Stop loss — an instruction to close the position automatically once it has lost a set amount. Your seatbelt.
Take profit — the mirror image: close automatically once a target gain is reached.

A stop loss and a take profit should be decided before you open the position, when you have no money on the line and your judgement is intact. Deciding a stop loss while the trade is already red is not deciding, it is bargaining.

A stop loss is not a guarantee. In a fast market — a news release, a weekend gap — your order can execute at a worse price than the level you set. That is called slippage, and it is one more argument for smaller positions.

Position size: the formula

Three numbers, one division:

Account — what you actually have on the platform.
Risk % — 1% if you are new.
Stop distance — how far, in price, your stop sits from your entry.

Position size = (Account × Risk %) ÷ Stop distance

Worked example. Account $500. Risk 1% — so $5 at stake. You want to buy at 1.0850 with a stop at 1.0830, which is 20 pips away. On a standard forex lot, one pip on EUR/USD is worth about $10, so 20 pips is $200 of risk on a full lot. You need $5 of risk, which is 5 ÷ 200 = 0.025 lots. Most platforms round to 0.01, so you would trade 0.02 or 0.03 lots — and you should round down, never up.

The important consequence: a wider stop means a smaller position, not a bigger loss. Beginners keep the position size fixed and move the stop, which is precisely backwards. Fix the money you are risking; let the position size fall out of the arithmetic. Our position size calculator does the division for you.

Leverage, without the mysticism

Leverage lets you control a position larger than your deposit. At 1:100, $100 of your money controls a $10,000 position. Your profit and your loss are both calculated on the $10,000.

That is all it is. It does not increase your chance of being right; it multiplies the consequence of being right or wrong by the same factor. On the $10,000 position above, a 1% move against you is $100 — your entire deposit.

Here is the part that surprises people: leverage does not have to change your risk at all. If you size positions from the formula above, high leverage simply means you need less cash sitting in the account as margin. Leverage becomes dangerous only when it tempts you to take a position you would never take with your own money — which, for most beginners, is exactly what it does. Start at the lowest leverage the platform allows.

Margin and the margin call

Margin is the slice of your balance the platform freezes as collateral while a leveraged position is open. As the position loses, free margin shrinks. Cross the platform's threshold and you get a margin call — a demand to add funds. Ignore it, or fall further, and the platform closes your positions itself, at market, at the worst possible moment. This is called a stop-out, and no one gets to argue with it.

A checklist to run before every entry

What is my entry price?
Where exactly is my stop loss, and why there — what does that level mean?
How much money, in currency, do I lose if the stop is hit? Is it 1% of the account or less?
Where is my take profit, and is the potential gain at least as large as the risk?
If this trade loses, does my plan change? (Correct answer: no.)

Before the next lesson: take any chart, pick a hypothetical entry and stop, and calculate the position size by hand once. Once by hand, then use the calculator forever. Doing it manually a single time is what makes the formula stick.