1. Choose a risk budget
Choose the cash amount at risk in your account currency. Include exposure from other pairs: several trades involving the same currency may create concentrated risk.
2. Convert pips to money
For EUR/USD, one pip is conventionally 0.0001. For 10,000 EUR, a one-pip movement is USD 1. Other pairs and account currencies require different conversions. Check the product and quantity conventions with your broker.
3. Check units and margin
Divide the cash risk budget by the stop distance expressed as cash risk per unit. Round down to the supported quantity and allow for fees, spread and slippage. Margin is collateral, not a maximum loss; leverage magnifies gains and losses.
A practical example
| Hypothetical risk budget | USD 50 |
|---|---|
| EUR/USD stop distance | 0.0050 (50 pips) |
| Quantity | USD 50 ÷ 0.0050 = 10,000 EUR |
| Pip value | USD 1 per pip at this size |
| Limitations | Before costs; actual loss may exceed planned risk |
Key takeaways
- Start with a cash risk budget.
- Use the correct pip value.
- Allow for costs and potential losses beyond the plan.