How to choose your risk
Day 04 of 26 · 8 min read · By DT Terminal
Risk is how much of your account you lose if your stop loss is hit. This lesson covers pips, lots and spread, how to set a stop loss and take profit, how to size a position from your risk, and why a small fixed percentage per trade keeps any one loss small.
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Pips, lots and pip value
A pip measures how far price moved. A lot is how big your position is. The pip value joins them: what one pip is worth at your size.
Pip
Unit of price movementThe 4th decimal on most pairs. 1.08500 to 1.08750 is 25 pips.
Gold
Measured in dollarsMeasured here in dollars of price movement: 3,350.00 to 3,355.00 is $5.
Lot
Position sizeOne forex lot is 100,000 units. One lot of gold is usually 100 ounces.
| Instrument | Measured in | 0.01 lot | 0.10 lot | 1.00 lot |
|---|---|---|---|---|
EURUSD, GBPUSD, AUDUSD | pips (0.0001) | $0.10 / pip | $1 / pip | $10 / pip |
USDJPY | pips (0.01) | ≈ $0.07 / pip | ≈ $0.67 / pip | ≈ $6.67 / pip |
XAUUSD | $1 of price | $1 / $1 move | $10 / $1 move | $100 / $1 move |
Pipettes, JPY pairs and where the values come from
On EURUSD a pip is 0.0001, so EURUSD moving from 1.08500 to 1.08750 is 25 pips. The 5th decimal is a pipette, a tenth of a pip. JPY pairs are the exception: a pip is the 2nd decimal, 0.01. USDJPY from 150.20 to 150.50 is 30 pips.
Pip conventions for gold differ between brokers, which is why this course uses dollars. If you hear someone call $0.10 a pip on gold, that is one common convention, not a rule.
A standard lot is 100,000 units of the first currency. Most people trade fractions: 0.10 (a mini lot, 10,000 units) and 0.01 (a micro lot, 1,000 units). Contract sizes vary by broker. Check the symbol's specification in your platform before you size a trade.
The table's values: a pip on EURUSD is 0.0001 of a dollar per euro, and one lot is 100,000 euros, so one pip is 100,000 × 0.0001 = $10. On USDJPY one pip is 100,000 × 0.01 = 1,000 yen, which at 150.00 yen to the dollar is about $6.67. On gold, 100 ounces moving $1 each is $100.
Spread, commission and swap
You buy at the ask and sell at the bid. The gap is the spread, so every trade opens slightly negative. It widens around news and at the daily rollover (17:00 New York).
Commission is a fee per lot. Swap is a small overnight fee, or sometimes a credit, for holding past rollover. Each is small on one trade and adds up over hundreds.
Look up the numbers in Calculators
EURUSD and XAUUSD at 0.10 lots against the table. Then see what a night's swap costs.Go deeper
On EURUSD the spread is often under 1.5 pips at a mainstream broker, and it widens a lot around news and at rollover.
Commission is charged by some account types instead of a wider spread. Count commission and swap when you judge whether a strategy really makes money.
Longs close at the bid, but shorts close at the ask. A short's stop is hit when the ask reaches it, which happens most when spreads widen.
Stop loss, take profit and R
Every trade gets three prices first: the entry, the stop loss (where you are wrong) and the take profit (where you get paid). Then you size it so being wrong costs a fixed amount. The stop decides the size, never the other way round.
Stop loss
Where your idea is proven wrong, just beyond the swing point it depends on.
Take profit
At the next logical level, such as the next swing.
1R
What you lose if the stop is hit. Making twice that is +2R.
Above, 1R is $100: a 20 pip stop under the swing low and a 40 pip target.
| Outcome | In dollars | In R |
|---|---|---|
| Stop hit | −$100 | −1R |
| Closed early at +20 pips | +$100 | +1R |
| Take profit hit | +$200 | +2R |
DT Terminal ChartsNAS100 · H1Go deeper
The stop does not go where the loss feels comfortable, or a random 10 pips away. The take profit can be the opposite level or the next swing, and you can take part of the trade off early (a partial) and leave the rest.
Results are measured in R so traders with different account sizes can compare them. The chart is the same idea on a real chart, a long on NAS100: the swing low first, the entry on the pullback, the stop just under the swing low and the target at twice the stop distance.
Sizing a position
Pick a fixed percentage of the account to risk, then size the trade so hitting the stop costs exactly that.
lots = (balance × risk %) ÷ (stop distance × value per lot)
The diagram's trade: $10,000 × 1% = $100, divided by 20 pips × $10 per lot, is 0.50 lots. Lots round down to 0.01, so you risk a little less than you asked for, never more.
Interactive tool
Position size calculator
This interactive tool runs in the app, with your own numbers.
Save your risk as a preset
Go deeper
0.01 is the smallest size most brokers take. Doing the sum by hand before every trade is where mistakes creep in, so save your risk once, as a percentage or a fixed amount, and size every trade from that same rule. Apply the preset to your practice account: its $100 is the same 1R as the diagram's trade.
Check the contract, then size
Index and crypto contract sizes vary by broker. Read the symbol specification in your platform before you size anything.
Worked example
Example 01: Sizing a NAS100 trade
The worked example, with every number walked through, is in the app.
The NAS100 working, and a BTCUSD short
On some brokers one lot of NAS100 moves $1 per index point, on others $10 or more. Example 01 assumes $1 per point per lot. Account $10,000, risk 1%, so 1R = $100. A long at 19,850.0 with the stop under the swing low at 19,810.0 is a stop distance of 40 points. A 2R target is 80 points away, at 19,930.0. At $10 per point the lot number is ten times smaller for the same risk, so sizing from the wrong specification is a ten times mistake in one direction or the other.
Worked example
Example 02: Sizing a BTCUSD short
The worked example, with every number walked through, is in the app.
Why the percentage matters
Every trader has losing streaks. Here are ten losses in a row, and the gain needed to recover.
| Risk per trade | After 10 losses in a row | Gain needed to recover |
|---|---|---|
| 1% | −9.6% | +10.6% |
| 2% | −18.3% | +22.4% |
| 5% | −40.1% | +67.0% |
| 10% | −65.1% | +186.8% |
Recovery grows faster than the loss. A 65% drop needs almost 187% to repair.
Worked example
Example 03: A $5,000 account over a bad week
The worked example, with every number walked through, is in the app.
Go deeper
Each loss in the table is taken as a percentage of the balance at the time. A 10% drop needs about 11% to repair; a 65% drop needs close to tripling what is left.
In the bad week, the same setups and the same stops lost every day. At 1% the next trade still risks $47.55. At 5% the pressure to win it back fast is exactly what makes the next trade worse.
Moving a stop closer to protect profit is a different decision from widening it. The right risk figure depends on your account, your strategy and any rules your broker or prop firm sets.
Check yourself
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Quiz
Check yourself: 2 questions
Answer each question and see why it is right, in the app.