Position Sizing Models
Strategy is only half the game. Your position sizing model controls how much you risk, how deep your drawdowns can go, and how stable your compounding becomes. This module breaks down professional sizing models and shows you a workflow you can execute.
1) What Position Sizing Really Controls
Position sizing is how you convert edge into outcomes. It controls the volatility of your equity curve, the depth of drawdowns, and how likely you are to survive losing streaks.
Normalize
- Risk per trade (percentage of equity)
- Risk unit (R): stop distance defines 1R
- Exposure across correlated trades
- Volatility regime (ATR / realized volatility)
Cap
- Max daily/weekly loss
- Max open risk (sum of risks)
- Max correlation / same-direction exposure
- Risk reduction during unstable regimes
2) Core Position Sizing Models
Choose one base model and keep it stable. Then add caps and regime rules. Professionals prefer robust and boring over clever and fragile.
Risk a fixed % of equity per trade (e.g., 0.25%–1%). Position size changes with stop distance.
Simple, stable, and easy to execute. Works well when combined with max open risk and correlation caps.
Add-on: exposure capsUsing fixed lots instead of fixed risk. Your true risk becomes random across volatility regimes.
Fix: stop + % ruleAdjust stop distance using ATR (or realized volatility). Size reduces when volatility expands.
Volatility regimes shift. ATR-based sizing helps keep effective risk stable and reduces blow-ups in fast markets.
Add-on: regime filtersATR is lagging. Use smoothing and avoid reacting to single spikes without confirmation.
Fix: smoothing + capsTheoretical optimal growth sizing under stable edge assumptions. Can be highly aggressive.
Common professional approach: use 0.25× or 0.50× Kelly to reduce drawdown volatility.
Pro: lower varianceEstimation error. If your win rate or payoff is misestimated, Kelly oversizes quickly.
Fix: fractional + capsReduce risk as drawdown increases. This stabilizes equity and improves survivability during bad periods.
Prevents emotional over-sizing during a drawdown. Your system naturally “de-levers” when under pressure.
Add-on: stop trading thresholdRecoveries can be slower. Use it as a stabilizer, not a way to ignore a broken system.
Fix: regime review3) Model Comparison
Pick a base model and then apply caps. Pros prioritize robustness and execution consistency.
| Model | Strength | Main risk | Best with |
|---|---|---|---|
| Fixed Fractional | Simple, stable, easy to execute | Ignores volatility unless stops adapt | Max open risk + correlation caps |
| Volatility (ATR) | Adapts to market speed | Lagging; sensitive to spikes | Smoothing + strict caps |
| Kelly | Max growth (theory) | Aggressive under estimation error | Fractional Kelly + hard limits |
| Drawdown-Scaled | Protects capital in bad streaks | Slower recovery | Clear stop-trading rules |
4) Mini Position Sizing Calculator
Quick fixed-fractional sizing (education). Input your equity, risk %, and stop value per unit. Always verify contract specs with your broker/platform.
Inputs
5) Pro Sizing Workflow
Repeatable process
- Pick base model: fixed fractional is the default
- Define stop logic: stop defines 1R
- Apply caps: max open risk + correlation limits
- Regime rules: risk down in high volatility/transition
- Weekly review: drawdown, exposure, rule breaks
Practical constraints (guideline)
- Risk per trade: 0.25%–1%
- Max open risk: 2–4× single-trade risk
- Max daily loss: hard stop
- Correlation cap: no stacked exposures
- Drawdown rule: reduce risk or pause
6) Common Mistakes
Your real risk changes across volatility regimes. This is a common blow-up pattern.
Fix: % riskMultiple trades can stack exposure. Correlations turn “diversification” into one big bet.
Fix: max open riskIncreasing size after wins breaks your statistics and increases drawdown volatility.
Fix: rules only7) FAQ
Is 1% risk per trade always safe? +
It depends on strategy volatility, frequency, and correlation. Many traders prefer 0.25%–0.75% when markets are unstable or frequency is high.
Should I use Kelly? +
Use fractional Kelly or avoid it unless your edge is stable and well-measured. Fixed fractional with caps is usually more robust.
How do I size multiple open positions? +
Sum open risks across all positions, especially correlated ones, and keep total exposure below a max open risk limit.
Trading in financial markets involves significant risk and is not suitable for all investors. Past performance is not indicative of future results. This content is for educational purposes only and does not constitute investment advice. Always verify instrument specifications (contract size, pip value, tick value) with your broker/platform.