What is a worked example of stop distance and size?
A worked example shows, step by step, how “stop distance” and “size” relate in forex risk management. Stop distance is the difference between your entry price and your stop level, usually measured in pips. Size is the trade volume (often described as units or lots) that makes the potential loss at the stop match a chosen risk amount—under specified assumptions.
Below is a numerical scenario that you can independently verify by checking each conversion and arithmetic step. No live market data is used.
How stop distance and size work (definitions and inputs)
1) Choose entry, stop, and risk
- Entry price: the price you assume you enter at.
- Stop price: the price where the position would be exited.
- Risk amount: the maximum loss you plan to measure in account currency.
2) Convert stop distance to pips
- Pip definitions depend on the currency pair quote format.
- For many major pairs quoted to 5 decimals, a pip is typically 0.00010 (one “pip” equals 10 “points”).
3) Compute the pip value for the assumed trade size
- Pip value is the account-currency value of a one-pip move for a given position size.
- Pip value depends on: pair, contract/lot size, and whether your account currency equals the quote or base currency.
4) Solve for the position size
- If pip value is known per unit of volume, then:
- Position size is scaled so that:
- (stop distance in pips) × (pip value per unit) = (risk amount).
Worked numerical example (with explicit assumptions)
Assume these inputs and assumptions:
- Currency pair: a pair with a pip size of 0.00010 for the last decimal place. (This is a common convention; confirm for the pair.)
- Entry price (assumption): 1.10000
- Stop price (assumption): 1.09850
- Account currency matches the pip value currency for the calculation below (simplifying assumption).
- Account risk amount: $100
- Assumed pip value per standard lot: $10 per pip per 1.00 lot
Step A: Compute stop distance in pips
- Price difference = 1.10000 − 1.09850 = 0.00150
- If 1 pip = 0.00010, then stop distance in pips = 0.00150 / 0.00010 = 15 pips
Step B: Use pip value to solve for size
We want the loss at the stop to equal the risk amount:
- Risk ($100) = stop distance (15 pips) × pip value per lot ($10 per pip per lot) × lots
Rearrange:
- lots = 100 / (15 × 10)
- lots = 100 / 150
- lots = 0.6667 lots (rounded)
Step C: Quick verification
- Expected loss at stop = 15 pips × ($10 per pip per lot) × 0.6667 lots
- = 15 × 10 × 0.6667
- = 150 × 0.6667
- ≈ $100
This is the core idea: stop distance determines how many pips you are exposed to; size is chosen so that those pips correspond to your chosen risk amount, given your assumed pip value.
Limitations and failure modes (what can break)
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Pip value assumptions may not match reality If the pip value per lot is different from the assumption (due to pair, contract specifications, or account currency handling), the computed size will not produce the intended loss at the stop.
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Stop distance may be mis-measured Pip definitions and quoting formats differ (e.g., 4 vs 5 decimals, broker-specific point conventions). If you convert using the wrong pip size, your pips—and therefore size—will be wrong.
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Execution can change the actual loss Even if the stop level is set, real exits can differ because of spread and slippage. That means realized loss at the stop may be higher or lower than the simplified “pips × pip value” model.
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Costs are not included in the simple model If there are commissions or other trade costs, the simplified risk calculation (based only on price movement) may understate total loss.
Verification and next question
To verify the worked example yourself, check:
- The pip conversion used for the pair (pip size and decimal format).
- The stop distance in pips computed from entry and stop prices.
- The pip value per lot (and how it maps to your account currency).
- The arithmetic that links pips × pip value × lots to the chosen risk.