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Trading Foundations · Lesson 05 of 06

Position Sizing and Managing Exposure

Position sizing means choosing how much exposure to take. The same price movement can produce very different gains or losses depending on position size and the product’s contract specifications.

In this lesson
Learning journal
Course outline · Lesson 05 of 06
  1. 01Understanding Trading and Risk
  2. 02Reading Charts and Timeframes
  3. 03Identifying Market Structure
  4. 04Building a Trading Plan
  5. 05Position Sizing and Managing Exposure
  6. 06Keeping a Trading Journal
Observe

For a simplified linear product:

Planned cash risk = hypothetical account balance × chosen risk fraction.

Illustrative quantity = planned cash risk ÷ loss per unit at the planned stop.

The loss per unit must reflect the instrument’s contract value and be expressed in your account currency. Check product specifications rather than applying the same calculation blindly across instruments.

Worked example

Worked example

Assume a hypothetical balance of 1,000 account-currency units and a 1% practice risk fraction.

Planned cash risk: 1,000 × 0.01 = 10 units.

If one unit of position size would lose 2 account-currency units at the planned stop, the illustrative quantity is:

10 ÷ 2 = 5 units, before costs.

The 1% figure is an arithmetic example, not a personal recommendation.

Costs, currency conversion, minimum position sizes, and permitted size increments can change the calculation. Round down where necessary. If the minimum position exceeds your planned limit, skip the practice trade.

Margin is the collateral required to hold a position; it is not the same as maximum possible loss. Leverage increases exposure relative to your funds.

Actual losses can exceed a stop-based estimate because of gaps, slippage, or product conditions. Several related positions can also concentrate exposure.

Practise

Practical exercise

Use a hypothetical risk budget of 10 units. Assume whole-unit position sizes, a minimum size of one, and no costs for this arithmetic exercise.

Calculate the permitted quantity when the loss per unit is:

  1. 2 units.
  2. 4 units.
  3. 20 units.
Review the exercise answers

Exercise answers: 5 units; 2 units after rounding down; skip the third trade because 0.5 is below the minimum.

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Review · 5 questions

Knowledge check

Write your answers in your learning journal before checking the answer key.

1. What is 1% of 1,000?

  1. A. 1.
  2. B. 10.
  3. C. 100.

2. A risk budget of 10 divided by a per-unit loss of 2 gives what quantity before costs?

  1. A. 5.
  2. B. 12.
  3. C. 20.

3. Is required margin the same as maximum possible loss?

  1. A. Always.
  2. B. No.
  3. C. Only for beginners.

4. What should you do if the minimum position exceeds your planned limit?

  1. A. Round up.
  2. B. Ignore the limit.
  3. C. Skip the trade.

5. Can actual loss exceed the planned stop-based estimate?

  1. A. Yes.
  2. B. Never.
  3. C. Only without leverage.
Reveal the answer key
  1. B — 1,000 × 0.01 = 10.
  2. A — 10 ÷ 2 = 5.
  3. B — Collateral and potential loss are different.
  4. C — Rounding up would exceed the limit.
  5. A — Execution and product conditions can increase realised loss.