What Does Stake Size Mean?

Stake size refers to the amount of money you risk per point movement in the market. Whether you're trading forex, indices, commodities, or other financial instruments, understanding stake size is crucial for managing risk, optimising returns, and maintaining control over your trading capital.

Breaking it Down: What is Stake Size?

A larger stake size increases both potential profits and potential losses, whereas a smaller stake size reduces both. This is why risk management is so important when selecting a stake size.

How stake size works in practice
Let’s take an example using EUR/USD, the most traded currency pair in the world.

• You buy EUR/USD at 1.0494.
• You set your stake size to £1 per point movement.
• The price rises, and the current sell price is now 1.0516.
  
  

Since you bought at 1.0494 and sold at 1.0516, the price has moved 22 points (or pips) in your favour.

Your profit is calculated as:
22 pips × £1 per pip = £22 profit.

If the price had moved against you by 22 pips instead, you would have made a £22 loss.

This simple example demonstrates the importance of carefully choosing your stake size, as it directly impacts how much money you can gain or lose in each trade.

How Stake Size Differs Across Markets

Stake size works similarly across various asset classes, though the value per point movement may differ depending on the market you are trading. Here’s how it applies to different markets:

Forex trading
In forex, prices move in pips, which are usually the fourth decimal place of a currency pair (except for pairs involving the Japanese yen, where it's the second decimal).

• If trading EUR/USD with a £1 stake per pip, a 10-pip movement equals a £10 gain or loss.
• Standard lot sizes in forex are typically 100,000 units, meaning 1 pip movement often equals $10 per lot in major currency pairs.

Index trading
Indices such as the FTSE, NASDAQ, and DAX move in points.

• If you trade the FTSE with a £5 stake per point, a 10-point move results in a £50 profit or loss.
• Indices tend to have tighter spreads and lower volatility compared to some commodities or forex pairs.

Commodity trading
Commodities such as gold, oil, and silver also have unique stake sizes:

• If you set a £2 stake per point in gold (XAU/USD) and the price moves 15 points, your gain or loss is £30.
• Commodities are often more volatile, meaning prices can move significantly within a short period.
  
  

Understanding the specific stake size rules for each market helps traders manage their risk more effectively.

Risk Management Considerations

Setting the right stake size is essential for long-term success. Here are some key factors to consider when determining the appropriate stake size for your trades:

Account size
A larger trading account allows for a slightly higher stake, but you should never risk too much on a single trade. Many professional traders follow the 1% rule, meaning they risk no more than 1% of their total account balance on any trade.

Leverage
Brokers offer leverage, allowing traders to control larger positions with a smaller deposit. For example, with 1:10 leverage, a £1,000 deposit lets you control a £10,000 trade. However, leverage magnifies both profits and losses, so it should be used carefully.

Market volatility
Highly volatile markets experience large price swings, increasing potential profits but also increasing risk. When trading in volatile conditions, using a smaller stake size can help manage exposure.

Stop-Loss placement
A stop-loss order automatically closes your trade at a pre-set level to limit losses. If you place your stop-loss 50 points away and your stake size is £1 per point, your maximum risk on the trade is £50. Choosing an appropriate stop-loss level in relation to your stake size is key to effective risk management.

3 Key Takeaways

• You control how much you risk per point movement → This is the core of stake sizing. Adjusting your stake size allows you to tailor risk to your account size and trading style.
• Leverage allows you to trade larger positions → But it also increases risk, so it's essential to use it wisely.
• You can profit from falling markets too → In CFD trading, you can "go short" and make money when prices drop, as well as when they rise.
  
  

By understanding and managing your stake size effectively, you can improve your trading strategy, limit unnecessary risk, and trade with greater confidence.