Direct answer
In forex, “stop distance” describes the price difference between an entry level and a stop level. “Size” (position size) describes how large the trade is—typically the number of lots or units—so that the monetary effect of that stop distance matches the risk the trader is trying to manage. The mechanism is a conversion chain: price movement → pips (or points) → pip/point value in account currency → cash loss for the stop distance → chosen lot size.
This does not guarantee outcomes. Markets move, spreads widen, and execution may differ from the levels assumed in a calculation.
Mechanics: define the inputs and the core model
1) Stop distance
Stop distance is measured in price terms, commonly expressed as pips for currency pairs where pip conventions apply. Conceptually:
- Entry price: where you assume the trade starts.
- Stop level: where a loss would be “cut” (used for the risk math).
- Stop distance = |entry − stop|.
Important: the stop distance you use for calculations is an assumption based on the entry and chosen stop level. The market may not reach or fill at the same prices you used.
2) Size (position size)
Position size is the trade volume selected to scale the cash impact of the stop distance. A common way to express the model is:
- Cash at risk (or target loss): the maximum loss you want the stop distance to represent.
- Stop distance: how much the price is allowed to move against you.
- Conversion factor: how much one pip (or one point) is worth in account currency for the chosen contract size.
Then the core idea is:
- Lot size = (Cash at risk) ÷ (Pip value × Stop distance in pips).
This is a “math mapping” between risk in money and risk in price movement. It depends on the instrument’s contract specification and the pip value calculation method.
3) Pip value and contract specification
To turn pips into money, you need an estimate of pip value. Pip value depends on:
- The quote and base currencies of the pair.
- The account currency.
- The contract size per lot (for example, how many units are in one standard lot).
- The current exchange rate if an intermediate conversion is required.
Because those pieces vary by provider and instrument, any calculation must state the assumptions used for pip value.
4) Assumptions for every example
A “worked” example must declare at least:
- Entry price and stop level (to compute stop distance).
- Pip convention used for the pair (what counts as one pip).
- Account currency and whether pip value uses a live conversion rate or a fixed assumption.
- Contract size per lot used by the broker or platform.
Without explicit assumptions, two people can compute different position sizes from the same “stop distance” phrase.
Evidence or example: step-by-step calculation sequence
Below is an illustrative calculation sequence. The numbers are placeholders to show the steps; they are not a prediction of real trading results.
- Choose an entry and a stop level.
- Example assumption: entry = E, stop = S.
- Stop distance = |E − S|.
- Convert the stop distance into pips.
- Determine pip size for the pair (for many major pairs it is related to the last decimal place, but the exact rule depends on the quote format).
- Stop distance in pips = |E − S| ÷ pip_size.
- Determine pip value for the position size unit you will use.
- If your contract is defined per standard lot, compute pip value for one standard lot in account currency under your chosen assumptions.
- Convert the chosen cash risk into lot size.
- Cash at risk (R) is expressed in account currency.
- Pip risk = Pip value (per lot) × stop distance (in pips).
- Lot size = R ÷ Pip risk.
- Place the trade with a matching stop level.
- The “stop distance” that you calculated should match the stop order level you submit.
If the stop order fills as expected and if the entry price matches the entry assumption, then the cash loss should be close to R (after accounting for costs). In practice, execution and costs can change the realized result.
Limitations and risks: where the model can fail
1) Spread and execution quality
Forex trading typically involves a bid-ask spread. If your assumed entry price differs from the actual filled price, the realized stop distance may change. Similarly, if your stop is triggered when spreads widen, the fill price can deviate from the stop level used in calculations.
2) Slippage and partial fills
Stop orders are designed to limit loss, but execution is not guaranteed at exactly the stop price. Slippage can make the realized loss larger than the modeled value based on the planned stop distance.
3) Costs and financing
Costs such as commissions and swap/rollover (financing for holding positions) can affect total profit and loss. A position-size calculation that focuses only on stop-distance cash risk may underestimate total cost impact.
4) Changing market conditions
The mapping from pips to money can change if pip value depends on exchange-rate conversion and if the relevant conversion rate differs from the assumption used during sizing.
5) “Stop distance” is not the same as an assured loss
Even with correct math, the realized outcome depends on whether the stop order triggers and fills as expected. Therefore, stop distance and size describe a planning framework, not an outcome guarantee.
Material limitation summary: stop-distance sizing assumes stable relationships (entry, stop fill, conversion for pip value). Those relationships can break when spreads, execution, and costs differ from the assumptions.
Verification and next question
To independently verify the concept, you can check whether your own calculation follows this chain:
- Compute stop distance from the entry and stop levels you plan to use.
- Convert that distance into pips using the pair’s pip convention.
- Compute pip value in your account currency from the instrument’s contract specification.
- Use cash at risk ÷ (pip value × pips) to get the position size.
If any of those steps are unclear, the most practical next question is: what pip convention and contract specification does your platform use for that instrument, and how does it compute pip value in your account currency?