Definition and purpose of a worked example
A Position Size Calculator is a method for estimating how large a trade should be based on a chosen risk framework (for example, “I want to lose only a fixed amount if my stop is hit”). A worked example is a transparent, numbers-in, numbers-out demonstration that shows the full calculation path using explicit assumptions, so you can repeat it and verify where each number comes from.
Because position size is tied to assumptions (prices, stop distance, contract size, pip/point value, and sometimes costs), a worked example should separate stable mechanics (the arithmetic and unit logic) from variable conditions (market prices and execution details).
Mechanics: inputs, key terms, and the calculation flow
A typical position size workflow uses these inputs:
- Risk amount (R): The maximum loss you want to limit under the stop scenario.
- Entry price and stop price: The difference between them defines stop distance.
- Pip/point value (V): How much one pip (or one point) is worth for one unit of position size.
- Position size (S): The amount of the asset you would trade (often expressed in lots or units).
Stable mechanics (common logic, even if exact formulas differ by calculator):
- Compute stop distance = |entry − stop|.
- Convert stop distance to the calculator’s unit (pips or points).
- Compute loss per unit = (stop distance in pips/points) × V.
- Compute position size = R ÷ (loss per unit).
To make the example verifiable, every assumption must be stated, especially assumptions that link prices to pip/point value.
Evidence or example: a transparent numerical scenario
Below is a worked example that focuses on arithmetic and unit consistency. It assumes a simplified “loss happens exactly at the stop price” model and does not include slippage or variable execution effects.
Assumptions (stated explicitly)
- Risk amount R = 100 (in account currency).
- Entry price = 1.20000.
- Stop price = 1.19800.
- The instrument uses pip size = 0.00010.
- The pip value per 1 unit of position size (as defined by the calculator) is V = 10 per pip.
- No additional costs, and stop is filled exactly at the stop level.
Step-by-step calculation
- Stop distance in price terms: |1.20000 − 1.19800| = 0.00200.
- Stop distance in pips: 0.00200 ÷ 0.00010 = 20 pips.
- Loss per unit of position size: 20 pips × 10 (per pip) = 200.
- Position size: S = 100 ÷ 200 = 0.5 units of position size (in the same unit system used by V).
How to independently verify
To verify this worked example, you only need to check three arithmetic links:
- The conversion from price distance to pips (0.00200 / 0.00010).
- The multiplication to get loss per unit (20 × 10).
- The division for position size (100 / 200).
If any assumption changes—for example, pip size, pip value, or the stop distance—then the computed position size changes.
Limitations and risks: what can break the calculation
A worked example clarifies mechanics, but it does not remove uncertainty. Material limitations and failure modes include:
- Wrong pip/point value (V): If the calculator’s unit definition differs from your instrument’s actual contract specification, losses per pip can be misestimated.
- Unit conversion errors: Mixing price decimals, pips, and points (or using the wrong pip size) can produce large sizing errors.
- Ignoring transaction costs and spreads: Costs can increase realized loss versus the simplified stop-only model.
- Stop not filled as assumed: Slippage, partial fills, or execution delays can cause realized loss that differs from the stop-distance calculation.
- “Historical relationships” confusion: Past trading behavior does not guarantee that this risk-to-loss mapping will hold in future conditions.
Verification or next question: what to check in any calculator
When you use or compare worked examples, verify the assumptions that control the arithmetic: pip size, how V is defined, the stop distance unit conversion, and whether costs and execution effects are included. If you want, you can also restate the same example with a different stop distance to see how sizing scales, using the same unit assumptions.