Two traders can take identical signals on identical instruments and end the year with completely different results, because the size of each position decides how much of the account any single outcome moves. Sizing is not a refinement applied to a strategy; it is the part of the strategy that determines whether the account survives long enough for the edge to appear.
What each method optimises
- Fixed fractional: constant percentage of equity at risk, so losses shrink automatically in a drawdown.
- Fixed ratio: size increases only after a defined amount of profit is accumulated.
- Volatility-based: constant risk in currency terms across instruments of different ranges.
- Fixed lot: simplest, and the one that scales worst in both directions.
Fixed fractional
The most widely used approach risks a constant percentage of current equity on each trade. Position size is derived, not chosen: divide the currency amount you are willing to risk by the stop distance in ticks times the tick value, and the answer is the number of lots.
Its important property is that it is self-correcting. As equity falls, the currency at risk falls with it, so position size shrinks automatically during a losing run. An account risking two percent per trade loses roughly eighteen percent over ten consecutive losses rather than twenty, and the difference grows with the length of the streak.
The property that makes it safe also makes recovery slower, because size shrinks precisely when a recovery would benefit from scale. This is the correct trade-off for almost everyone: the method's purpose is to guarantee there is still an account when the strategy comes back.
One to two percent is a conclusion, not a convention
The usual advice exists because of how streaks behave. At two percent, a run of ten losses costs about eighteen percent of the account, which is recoverable. At ten percent, the same run costs about sixty-five percent, which requires nearly tripling the remainder to return to level. Streaks of ten happen to strategies that win most of the time.
Fixed ratio
Fixed ratio sizing ties increases to accumulated profit rather than to current equity. Size goes up by one increment for each defined amount of profit earned, and back down symmetrically. The intent is to grow exposure more slowly than fixed fractional does when an account is doing well, and to grow it more decisively on a small account, where percentage-based sizing can be too conservative to be tradeable at all.
It suits accounts in the range where fixed fractional produces sub-minimum position sizes, and traders who want growth in exposure to be a deliberate step rather than a continuous drift. Its cost is complexity and the need to choose the increment, which is an additional parameter to get wrong.
Volatility-based sizing
The third approach sizes so that a fixed multiple of an instrument's recent range represents the same currency risk on every instrument. Position size becomes inversely proportional to volatility: smaller on instruments that move a lot, larger on quiet ones.
This is the correct method for anyone trading a diverse instrument list, because it removes the distortion of applying one stop distance across instruments with different ranges. Without it, a portfolio that includes both a quiet major pair and a volatile cross is implicitly taking several times more risk on the second.
The usual implementation uses average true range over a recent window, sets the stop at a multiple of it, and derives size from that stop. The parameters — the window, the multiple — are choices that should be made once and tested, not adjusted per trade.
Fixed lot, and why it fails
Trading the same number of lots regardless of account size or instrument is the default that most traders start with, usually without deciding to. It fails in both directions: as the account grows the risk per trade becomes trivially small and the strategy underperforms its potential; as the account shrinks the risk per trade becomes proportionally larger, accelerating the decline exactly when it should be decelerating.
That second failure is the dangerous one. A fixed lot size on a falling account is an increasing percentage risk, which turns an ordinary drawdown into a terminal one.
The arithmetic of recovery
The reason all of this matters is asymmetry. A ten percent loss requires an eleven percent gain to recover. A thirty percent loss requires forty-three percent. A fifty percent loss requires one hundred percent. The relationship is not linear and it becomes punishing quickly.
Sizing decisions are therefore decisions about which part of that curve you will operate on. A method that keeps the worst realistic streak within twenty percent leaves a recoverable position. One that permits fifty percent requires a doubling to get back, which very few strategies produce on demand.
Setting a size rule you can hold to
- Establish your strategy's worst historical losing streak, and assume the real one is longer.
- Choose a risk percentage such that that streak costs less than a quarter of the account.
- Derive position size from stop distance and tick value, per trade, without exception.
- Recalculate risk in currency terms from current equity, not from the starting balance.
- Write the rule down and record every deviation from it.
- Review deviations monthly — they cluster after losses, which is when they cost most.
Where sizing rules break
They break after losses, and they break in the same way for almost everyone: a larger position taken to recover what was lost. The impulse is understandable and the arithmetic is exactly wrong, because it increases exposure at the point where the account can least afford it.
The practical defence is to make size a computation rather than a decision. If the number of lots is derived from the stop and the equity, there is nothing left to exercise judgement over at the moment when judgement is least reliable.
Common questions
How much should I risk per trade?
Enough that your strategy's realistic worst losing streak costs a fraction of the account you can recover from. For most methods that lands between one and two percent, but it follows from the streak length rather than from the convention.
Should position size change with confidence in a setup?
Only if the confidence is measurable and was tested — a rule that sizes A-grade setups larger and was verified over a sample. Discretionary confidence adjustments usually correlate with recent results rather than with expectancy.
Does a tighter stop let me trade bigger?
Arithmetically yes, and that is the trap. A stop tightened to permit a larger position is placed by the size calculation rather than by the market structure, and it will be hit by ordinary noise more often.
What about scaling into positions?
Scaling is a sizing method in its own right and needs its own rule: the total risk of the fully built position is what must fit your limit, not the risk of the first tranche.
