Risk Management: Stop Loss, Take Profit and Position Size
A setup tells you where to trade. Risk management decides whether the result can hurt you. This lesson gives you the formulas, worked position-size examples for EURUSD and gold, and the numbers that explain why small, fixed risk matters.
- The position-size formula and the value of a pip or a $1 move
- Worked lot-size examples for EURUSD and XAUUSD
- Break-even win rates for 1:1, 1:1.8 and 1:2 plans
- How losing streaks grow with the risk per trade
- The costs that quietly change your real risk
Order of operations
- Stop first. Put the stop where the idea is proven wrong — beyond the zone or the protected swing (see Lesson 3 and Lesson 4).
- Target second. Use the next logical structure: the prior swing high for a BUY, the prior swing low for a SELL.
- Check the ratio. If reward ÷ risk is below your minimum, skip. Do not move the stop or the target to fix it.
- Size last. Calculate the lot size that makes a stop-out cost exactly your planned amount.
The formula
| Instrument | Unit | Value per standard lot | Note |
|---|---|---|---|
| EURUSD | 1 pip = 0.0001 | $10.00 | 100,000 units of the base currency |
| XAUUSD | $1.00 price move | $100.00 | When 1 lot = 100 oz — common, but check your broker’s contract size |
Account $10,000, risk 1% = $100. Stop 25 pips.
$100 ÷ (25 × $10) = 0.40 lots
Account $10,000, risk 0.5% = $50. Stop 13 pips (the plan from Lesson 4).
$50 ÷ (13 × $10) = 0.385 → 0.38 lots (actual risk ≈ $49.40)
Same instrument and formula as Example 1 — only the risk percentage and stop distance changed, which is exactly why the size comes out different.
Account $10,000, risk 0.5% = $50. Stop $15.00 away. With 100 oz per lot, 0.01 lots = 1 oz, so each $1.00 move is worth $1.00 per 0.01 lots.
Risk per 0.01 lots = $15.00 → $50 ÷ $15.00 = 3.33 → 0.03 lots (actual risk $45)
Gold’s wider stops mean much smaller lot sizes than a Forex pair for the same dollar risk. If the result is below your broker’s minimum (often 0.01 lots), the trade is too large for the account — skip it.
What a reward-to-risk ratio really requires
The ratio decides how often you need to be right just to break even, before costs:
| Plan | Break-even win rate |
|---|---|
| 1 : 1 | 50.0% |
| 1 : 1.5 | 40.0% |
| 1 : 1.8 | 35.7% |
| 1 : 2 | 33.3% |
| 1 : 3 | 25.0% |
These are arithmetic, not predictions. A 1 : 1.8 plan does not mean you will win 36% of the time; it means that below that rate the plan loses money.
Why the risk per trade must stay small
Losing streaks happen to every method. What changes is how deep they cut:
| Risk per trade | After 5 losses | After 10 losses | Gain needed to recover 10 losses |
|---|---|---|---|
| 1% | −4.9% | −9.6% | +10.6% |
| 2% | −9.6% | −18.3% | +22.4% |
| 5% | −22.6% | −40.1% | +67.0% |
(Each loss is taken as a percentage of the remaining balance.) Prop-firm evaluations add hard daily and overall loss limits on top of this. Rules differ between firms and change over time, so read the current rules of any program before trading it.
Costs change your real risk
Spread, commission and slippage are paid on every trade. Suppose a gold spread of $0.30 on a $15.00 stop: that is 2% more distance to cover before the trade is even at break-even. Around news, slippage can be far larger (see Lesson 8). Include costs when you check the ratio.
- The ratio to the next logical target is below your written minimum.
- The calculated size is below the broker’s minimum lot.
- You notice you want to tighten the stop “to afford” a bigger size.
- You have hit your daily loss limit or your planned number of trades for the session.
With your own account size and a risk of 0.5% and 1%, calculate the lot size for a 20-pip EURUSD stop and a $12.00 XAUUSD stop. Write the four answers on a card next to your screen.
- Using the same lot size on every instrument regardless of stop distance.
- Rounding lot sizes up.
- Widening the stop mid-trade because the position is losing.
- Raising risk after a winning streak.
- Stop → target → ratio → size, in that order.
- The stop decides the lot size, never the other way around.
- Small fixed risk keeps a normal losing streak survivable.