Fixed-fractional position sizing risks a fixed percentage of your account on every trade (commonly 1-2%). This ensures that a string of losses reduces position sizes proportionally, protecting capital during drawdowns. It's the most widely recommended position sizing method for discretionary traders because it's simple, sustainable, and mathematically sound.
Risk per trade = Account balance × Risk percentage (e.g., 1%). Position size = Risk per trade ÷ (Entry price - Stop loss price). Reduces position size during drawdowns automatically. Increases position size during growth periods. Compounding effect: winners grow the account faster than losers shrink it (at the same risk %).
Calculate before every trade: Position size = (Account × Risk%) ÷ Distance to stop. Example: $50,000 account × 1% = $500 risk. If stop is $5 away, position size = 100 shares.
If the loss would exceed 1-2% of the account, the position is too large. Reduce immediately. During drawdowns, natural position size reduction limits damage. Scale back risk % during high-volatility periods.
Applies to every trade on every timeframe
Most professional traders risk 0.5-2% per trade. Beginners should start at 0.5% and increase only with a proven track record. Even the best strategies have losing streaks — position sizing determines whether you survive them.
Risk of ruin calculates the probability that a trader will lose a specified percentage of their account — typically enough to end their trading career — given their win rate, average reward-to-risk ratio, and percentage risked per trade. This mathematical framework quantifies whether a trading strategy is survivable over the long run and helps traders set appropriate risk limits to ensure longevity.
Hedging is the practice of taking offsetting positions to reduce exposure to adverse price movements in your primary holdings. Rather than closing a profitable position or accepting full downside risk, hedging allows traders to protect capital during uncertain periods while maintaining their core exposure. Effective hedging balances protection cost against the risk being mitigated.
Trailing stop strategies dynamically adjust your stop-loss level as a trade moves in your favour, locking in progressively more profit while still giving the trade room to develop. Unlike fixed stops, trailing stops adapt to market volatility and price action, allowing traders to capture the majority of a trend move without exiting prematurely on normal pullbacks.
The Sharpe ratio measures risk-adjusted return by dividing excess return (above the risk-free rate) by the standard deviation of returns. The Sortino ratio improves on Sharpe by penalising only downside deviation, recognising that upside volatility is desirable. Both ratios help traders compare strategies on a level playing field and identify which approaches deliver the best returns for their level of risk.