Direct answer
A pip based position sizing method uses a small set of inputs to translate a “pip move” into money for your account. The required inputs are: (1) the instrument’s pip definition for the quoted pair, (2) the pip value in account currency (or the data needed to compute it), (3) the risk amount you want to measure against (often a risk per position), and (4) the stop distance measured in pips (derived from your planned entry and stop levels). Optional but often necessary inputs include (5) contract size / lot size rules for the instrument, (6) the account currency and exchange-rate inputs if conversion is needed, and (7) cost inputs (spread, commissions, or other execution costs) if you want the sizing to reflect real trading conditions.
Mechanism and definition of inputs
1) Pip definition (instrument-specific). A “pip” is the smallest standard price increment used for quoting a currency pair. The exact pip size depends on how the pair is quoted (for example, whether the last digit represents 0.0001 or 0.01 for the relevant market). This input determines how you convert prices into “pip distance.”
2) Pip value (money per pip). Pip based position sizing ultimately needs a money amount per pip movement. This can be provided directly by the broker/platform (pip value for a given lot size), or computed from stable mechanics using inputs like contract size, current quote conventions, and the account currency.
- If your account currency matches the instrument’s profit currency, the conversion step may be simpler.
- If currencies differ, you need an additional input: an exchange rate to convert the pip value into account currency.
3) Risk amount (measured in account currency). This is a chosen amount you use as the sizing “budget” for the stop-distance scenario. It is not inherently determined by forex mechanics; it is an assumption you supply, stated in your account’s base currency (or converted into it).
4) Stop distance in pips. This is the number of pips between the planned entry price and the planned stop level. It is derived from price inputs you assume for the scenario:
- entry price
- stop price
- pip size / pip definition Then compute: stop distance (pips) = |entry − stop| / pip_size (using absolute distance).
5) Contract size / lot sizing rules (instrument-specific). Position sizing depends on what one “lot” means for the instrument. You need the instrument’s contract size relationship to ensure the pip value scales correctly when you choose a position size (e.g., lots or units).
6) Costs and execution assumptions (optional but material). If you want the sizing to align with actual realized loss, you need to account for factors that change the effective loss relative to an idealized pip move. At minimum, you may need to define how spreads and commissions affect your effective stop outcome. Because these vary by market conditions and execution quality, you must treat them as assumptions rather than guarantees.
Evidence or example with explicit assumptions
Consider an example described purely as a calculation template (no live prices):
- Assumption A: The pip size for the pair is 0.0001.
- Assumption B: Your planned entry is 1.1000 and planned stop is 1.0950.
- Stop distance in pips = |1.1000 − 1.0950| / 0.0001 = 50 pips.
- Assumption C: For the chosen lot size, the platform (or your calculation) gives a pip value of 10 units of account currency per pip.
- Assumption D: You set a risk budget of 200 units of account currency.
- Position size in lots (conceptually) = risk budget / (stop pips × pip value per pip).
In practice, the key “inputs you must have” are: the stop distance in pips (from entry/stop and pip size), and the pip value in account currency (from contract rules and currency conversion, if needed). Without a consistent pip definition and a correct pip value in your account currency, the numerical output cannot be independently verified.
Limitations and risks (what can fail)
Material limitation: pip value can be wrong if currency conversion or quote conventions are mismatched. If your account currency differs from the instrument’s profit-related currency, any conversion used to express “money per pip” must be consistent with your platform’s conventions.