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.
Correlation-aware allocation goes beyond simple diversification by mathematically measuring how assets move together and sizing positions accordingly. Two highly correlated positions (e.g., ES and NQ) effectively concentrate risk. By adjusting allocation based on measured correlations, traders build portfolios with better risk-adjusted returns.
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.
Volatility-based position sizing adjusts trade size according to an asset's current volatility, ensuring that each position carries a consistent dollar risk regardless of how volatile the instrument is. By dividing fixed risk by the asset's average true range or standard deviation, traders normalise risk across different assets and market conditions, preventing outsized losses during volatile periods.
The Kelly Criterion is a mathematical formula for determining the optimal bet size to maximise long-term growth rate. Kelly = (bp - q) / b, where b = odds received, p = probability of winning, q = probability of losing. While theoretically optimal, full Kelly is too aggressive for most traders — half-Kelly or quarter-Kelly is more practical.