Fixed-Fractional Position Sizing
Overview
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.
Key Concepts
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 %).
Entry Signals
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.
Exit Signals
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.
Best Timeframes
Applies to every trade on every timeframe
Pro Tips
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.
More Topics in This Category
Risk of Ruin Modeling
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.
Risk-Reward Ratios
The risk-reward ratio (R:R or RRR) compares the potential loss (distance to stop loss) to the potential gain (distance to target) for each trade. A 1:2 R:R means you risk $1 to potentially make $2. By maintaining favourable risk-reward ratios, a trader can be profitable even with a win rate below 50%.
Hedging Fundamentals
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.
Portfolio Diversification
Portfolio diversification reduces risk by spreading capital across multiple uncorrelated or negatively correlated assets, strategies, and timeframes. True diversification requires correlation analysis — holding 10 tech stocks is not diversified. The goal is to generate returns from multiple independent sources rather than relying on a single trade or strategy.