Indices · Managing index risk · lesson 2 of 9 · 7 min read · David Alexander
Sizing: from risk to contracts
position sizing
Turning a money risk into a number of contracts. Risk budget divided by what one contract loses over the stop distance gives the size, and the answer is rounded down - a fractional contract cannot be held, and rounding up would exceed the risk you just chose.
Three inputs, one division, and the most consequential number in the position comes out.
The arithmetic
- Risk budget: the account balance times your risk percentage.
- Risk per contract: what one point is worth to you, times the stop distance in points.
- Contracts: the first divided by the second, rounded down.
The conversion from points to money is module 1 lesson 8, and it is the step that changes with your account currency.
Worked example
figures in USDA 10,000 US dollar account risking 1% per trade, a 20-point stop, on a dollar-settled index at $2 a point. No conversion.
- Risk 1% of a 10,000 account and the budget is $100. That is the decision; everything after it is arithmetic.
- The contract is $2.00 per point, which in your account currency is $2.00 a point. Over a 20 point stop, one contract puts $40.00 at risk.
- The budget buys 2.5000 contracts, so you trade 2 - rounded down, never up. That size actually risks $80.00, which is at or below what you chose.
Why it rounds down
You cannot hold a fraction of a contract, so the answer must be whole. Rounding up would put more at risk than the number you chose one lesson ago, which makes the whole exercise pointless.
So the position usually risks less than the budget, sometimes noticeably less. That gap is not waste - it is the cost of the instrument being lumpy, and knowing its size is the difference between sizing and guessing.
When the answer is zero
If one contract risks more than your whole budget, the honest output is zero contracts. Not one. The trade is too large for the account at that stop distance, and the choices are a tighter stop, a smaller contract, or not taking it.
Widening the risk to make the position possible is the same as not having a risk policy.
Try it yourself
Index position size calculator
How many contracts a chosen risk buys on an index, given the stop and the money per point.
Check your understanding
Question 1 of 3
Why is the contract count always rounded down?