Stop-Loss Distance in
Position Sizing
Learn how to measure stop-loss distance in pips, and why this figure is a required input for position sizing.
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Stop-loss distance is the third component of the position sizing formula introduced in this unit's overview. This guide explains what this means and how it's measured.
This lesson connects to the exit criteria concept from the Trading Essentials module and the volatility-position sizing discussion from the Market Guides module.
What Is Stop-Loss Distance?
Stop-loss distance refers to the gap, measured in pips, between your planned entry price and your planned stop-loss price. For example, if you plan to enter a trade at 1.2000 and place your stop loss at 1.1950, the stop-loss distance is 50 pips (since, for most currency pairs, one pip equals 0.0001 of price).
Why This Distance Must Be Determined Before Position Sizing
As covered in the earlier lesson on the position-size relationship, stop-loss distance is a required input for calculating position size, since a wider distance generally requires a smaller position size (to keep the monetary risk amount consistent), while a tighter distance allows for a larger position size within the same risk amount.
How Stop-Loss Distance Is Typically Determined
Stop-loss placement is generally determined based on your exit criteria (covered in the Trading Essentials module), which might reference technical levels like support and resistance (covered in the Market Guides module), or current volatility conditions (also covered in the Market Guides module's volatility and position sizing lesson), among other approaches.
A Note on JPY Pairs
It's worth noting that pip measurement differs for Japanese yen (JPY) currency pairs, where one pip typically equals 0.01 of price, rather than 0.0001 as with most other pairs. This distinction is relevant when measuring stop-loss distance for JPY pairs specifically, and is covered further in the next lesson on pip value.
🔖 Summary
Stop-loss distance measures the gap, in pips, between your entry and stop-loss prices, and is a required input for the position sizing formula. Determining this distance typically draws on your exit criteria and technical analysis, and it's worth noting that pip measurement differs for JPY pairs (0.01) compared to most other pairs (0.0001).
Frequently Asked Questions
What is stop-loss distance?
It's the gap, measured in pips, between your planned entry price and your planned stop-loss price.
How many pips is 1.2000 to 1.1950?
For most currency pairs, this represents a 50-pip distance, since one pip equals 0.0001 of price.
Why does stop-loss distance need to be determined before calculating position size?
It's a required input in the position sizing formula, and wider or tighter distances directly affect the resulting appropriate position size.
Does pip measurement differ for JPY pairs?
Yes, for JPY pairs, one pip typically equals 0.01 of price, rather than 0.0001 as with most other currency pairs.
Risk Warning
Trading forex and CFDs involves significant risk and may not be suitable for all investors. You may lose all of your invested capital. Please ensure you fully understand the risks before trading.
GTCFX operates as a multi-regulated group of companies, clients are kindly advised to confirm the specific legal entity, regulation, and jurisdiction under which they are being onboarded.
