What is a worked example of pip-based position sizing?
Pip-based position sizing is a way to choose a trade size by linking (1) the number of pips you expect the price to move and (2) the monetary impact of that move on your account. A “worked example” makes the steps explicit using numbers and stated assumptions, so you can reproduce the calculation without relying on live market data.
Below is one complete scenario. It is informational only and does not assume any outcome.
Mechanism: the core idea and inputs
To size a position using pips, you typically need:
- Stop distance in pips: how many pips correspond to the price move you want to control.
- Risk budget in account currency: the maximum amount you are willing to lose if that stop distance is realized.
- Pip value per unit (or per lot): how much one pip is worth in your account currency for a specific contract size.
A common simplification is to use:
Position size = (Risk budget) / (Stop distance in pips × Pip value per pip)
This separates stable mechanics (the formula and how you convert pips into money) from variable conditions (broker contract specs, pip definition by the instrument, spreads/fees, and currency conversion details).
Evidence / worked example with every assumption
Assumptions for the example
- Account currency: USD.
- Instrument: a forex pair where you measure price movement in pips, using a standard pip definition of 0.0001 for most major pairs.
- Contract sizing: you can trade in “lots,” and the provider defines a lot so that 1 lot corresponds to a fixed pip value.
- Pip value assumption: $10 per pip per 1 lot (this is an assumed input; in real use you must take it from your provider’s contract specifications and account currency conversion rules).
- Stop distance: 20 pips.
- Risk budget: $200.
Step-by-step calculation
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Compute money per pip for the chosen contract size:
- Pip value per lot = $10 per pip.
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Compute money at the stop distance for 1 lot:
- Stop distance = 20 pips
- Loss at stop per 1 lot = 20 × $10 = $200.
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Convert the risk budget into position size:
- Risk budget = $200
- Position size = $200 / $200 per lot = 1.0 lot.
What this example is showing
In this scenario, the assumptions imply that 1.0 lot makes the monetary loss at the 20-pip stop distance equal to the $200 risk budget.
Limitations and risks (material failure modes)
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Pip value may not be constant in practice Even if you start with a pip value assumption, the true pip value can differ due to instrument contract specs, account currency conversion, and how your provider calculates pip precision. If your pip value input is wrong, your resulting size can be too large or too small.
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Stop distance and execution reality are not the same Pip-based sizing assumes the realized price move matches the stop distance. With spread widening, slippage, or delayed execution, the effective loss can exceed the planned pip distance.
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Costs and non-pip items can change the actual outcome Fees, commissions, and financing/holding costs can affect net results. A calculation that accounts only for pip movement can underestimate total cost.
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“Historical relationships” do not validate future results Even if pip-based sizing is applied consistently, it does not imply future price behavior. Price volatility, liquidity, and market regime shifts can make pip-based risk control behave differently over time.
Verification and next question to ask
To verify pip-based position sizing independently, check these items using your provider’s documentation and your own account settings:
- Does your platform define a pip as 0.0001 (or something else) for that instrument?
- What is your pip value per lot/unit in your account currency?
- How exactly do spreads and execution affect the realized entry and exit prices relative to your assumed stop distance?
If you want, the next useful comparison question is: what are the limitations of pip-based position sizing in the presence of changing pip value and execution slippage?