Master position sizing to protect capital and maximize returns. Learn fixed fractional, Kelly Criterion, volatility-based methods, and optimal risk per trade.
Position sizing is the single most important factor in long-term trading success. You can have a profitable strategy but still blow up your account with poor position sizing.
95% of traders fail not because of bad strategies, but because of poor risk management. They risk too much per trade, experience a normal losing streak, and wipe out their account before they can recover.
Example: Risking 10% per trade means 7 consecutive losses = -52% account balance. You'd need +108% return just to break even. With 1% risk per trade, 7 losses = -7%, needing only +7.5% to recover.
| Risk Level | % Per Trade | Consecutive Losses to -50% | Best For |
|---|---|---|---|
| Ultra Conservative | 0.5% | 139 | Large accounts, beginners |
| Conservative | 1% | 69 | Most professional traders |
| Moderate | 2% | 35 | Experienced traders |
| Aggressive | 3-5% | 14-23 | Very high conviction trades only |
| Dangerous | >10% | 7 | ❌ Gambling, not trading |
The vast majority of successful traders risk 1-2% per trade. This allows them to survive 50+ consecutive losses while maintaining psychological capital. When you know you can weather any storm, you trade with confidence, not fear.
Risk a fixed percentage of capital per trade (1-2%). Position size adjusts based on stop loss distance.
Formula:
Position Size = (Account Size × Risk %) / (Entry Price - Stop Loss Price)
Pros
Cons
Mathematical formula that calculates optimal position size based on your edge (win rate and risk/reward).
Formula:
Kelly % = (Win Rate × Avg Win / Avg Loss) - (1 - Win Rate) / (Avg Win / Avg Loss)
Example: 55% win rate, 1:2 R:R → Kelly = (0.55 × 2) - (0.45 / 2) = 0.875 or ~9% per trade
Use Fractional Kelly
Full Kelly can be volatile. Most pros use 25-50% of Kelly. If Kelly suggests 10%, use 2.5-5%. This reduces volatility while maintaining most of the growth benefit.
Adjust position size based on market volatility using ATR (Average True Range). Larger positions in calm markets, smaller in volatile markets.
Formula:
Position Size = (Account Size × Risk %) / (ATR × ATR Multiplier)
Typical ATR multiplier: 1.5-2.0 (stop loss = 1.5-2× ATR below entry)
Low Volatility (ATR $2):
Stop $3 away → Larger position
High Volatility (ATR $8):
Stop $12 away → Smaller position
Invest a fixed percentage of capital regardless of stop loss (5-10%). Simpler but less risk-aware.
Example:
$10,000 account, 5% fixed → Always invest $500 per trade. If trade goes -10%, you lose $50 (0.5% of account). If -20%, lose $100 (1% of account).
Given:
Calculation
Shares = Risk Amount / Risk Per Share
Shares = $500 / $5 = 100 shares
Position Value = 100 × $175 = $17,500
This is 35% of account value but only 1% risk. If stopped out, lose exactly $500 (1%).
Given:
Calculation
Position Size = Risk / (Stop Distance × Pip Value)
Position Size = $200 / (160 × $10)
= $200 / $1,600 = 0.125 lots = 12,500 units
Standard lot = 100,000. So 0.125 lots. If stopped out 160 pips, lose exactly $200 (2%).
Given:
Kelly Calculation
Kelly = (0.60 × 2) - (0.40 / 2) = 1.0 or 100%
Half Kelly = 50% (more conservative)
Quarter Kelly = 25% = $6,250
Using Quarter Kelly: Position = $6,250 / $42,000 = 0.149 BTC
If stopped at $40,500, lose $223 (0.9% of account). Conservative but optimal for long-term growth.
| Risk Per Trade | Starting: $10,000 | After 10 Losses | Recovery Needed |
|---|---|---|---|
| 0.5% | $10,000 | $9,511 | +5.1% |
| 1% | $10,000 | $9,044 | +10.6% |
| 2% | $10,000 | $8,171 | +22.4% |
| 5% | $10,000 | $5,987 | +67.0% |
| 10% | $10,000 | $3,487 | +187% |
Notice how 10% risk per trade leaves you with 65% loss after just 10 bad trades. You'd need to nearly triple your remaining capital just to break even. Meanwhile, 1% risk leaves you down only 10%, easily recoverable. Lower risk = more opportunities to recover and profit.
After losses, traders increase position size to recover faster. This is revenge trading and leads to blown accounts. Stick to your risk rules, especially after losses.
Having 5 trades at 2% each sounds safe, but if they're all tech stocks or all EUR pairs, you're effectively risking 10% on one market move. Consider correlation in total portfolio risk.
Your 1% risk becomes 1.2-1.5% after commissions, spreads, and slippage. Factor in 0.2-0.5% total costs per trade when calculating position sizes.
Full Kelly assumes your edge estimate is perfect and creates high volatility. Real win rates vary. Always use 25-50% of Kelly (fractional Kelly) for practical risk management.
Position sizing determines how much capital to allocate per trade. It controls risk by limiting potential losses. Common methods include fixed percentage (risk 1-2% per trade), fixed fractional (invest 5-10% of capital), Kelly Criterion (optimal sizing based on edge), and volatility-based (adjust size based on ATR). Proper sizing prevents account blow-ups.
Professional traders risk 0.5-2% of capital per trade. Beginners should risk 1% maximum. This means on a $10,000 account, risk $100 per trade. With 1% risk, you can survive 100 consecutive losses. Higher risk (3-5%) increases reward but also ruin probability. Never risk more than 5% per trade.
Kelly Criterion is a formula that calculates optimal position size based on your edge: Kelly % = (Win Rate × Avg Win / Avg Loss) - (1 - Win Rate) / (Avg Win / Avg Loss). For a 55% win rate with 1:2 R:R, Kelly suggests 10% per trade. However, most traders use 25-50% of Kelly (fractional Kelly) to reduce volatility.
Yes, but systematically. As account grows, your fixed percentage naturally increases position size (compound growth). Don't manually boost size after wins - that's overconfidence bias. Stick to percentage-based sizing and let math handle the scaling.
If stop loss is far, your position size will be smaller to maintain fixed risk. Example: $10K account, 1% risk ($100), stop $10 away = 10 shares. Stop $50 away = 2 shares. This is correct - volatile trades should have smaller positions. Never widen stops to get bigger size.
Combine position sizing with optimal entry and exit timing
Integrate risk management into complete trading systems
Test your position sizing with worst-case scenario analysis
Size positions for 24/7 volatility and funding costs
Pair intraday sizing rules with tighter stops
Apply sizing within automated, execution-aware systems
Manage risk across multi-leg positions and Greeks exposure