Position sizing frameworks

Position sizing decides how much is at stake on each trade. Over a series of trades, it has more effect on outcomes than almost any other single decision, and it is entirely within the trader's control.

Common frameworks

• Fixed size: the same number of contracts every time. Simple, but risk changes as volatility and account size change.
• Fixed fractional: risking the same share of the account on each trade, so size shrinks after losses and grows after gains.
• Volatility targeting: sizing each position so it carries a similar amount of risk regardless of how volatile the market is, often using ATR to set the stop and then the size.
• Kelly criterion: a formula that calculates the size which would maximise long-run growth if the true win rate and payoff were known exactly.

The problem with precision

Every sizing formula depends on estimates: win rate, average win, average loss, volatility. Those estimates come from samples and contain error. The Kelly criterion in particular is highly sensitive to overestimating an edge, and full Kelly sizing can produce very deep drawdowns even when the estimate is right. Practitioners who use it commonly take a fraction of the result, and many avoid it entirely.

This lesson describes frameworks. It does not suggest any level of risk for any account.

Educational content only. Not financial advice. Consider independent professional advice before trading.