Position Sizing Strategies

Position sizing is the second half of any strategy. Your entry and exit rules determine when you trade; position sizing determines how much you make or lose. A good strategy with bad sizing will blow up your account. A mediocre strategy with disciplined sizing can survive indefinitely.

Fixed dollar sizing (always trade $10,000) is the simplest approach. It's easy to backtest but doesn't scale with account growth — your position gets smaller relative to your equity as the account grows. Good for testing, not ideal for live trading.

Fixed fractional sizing (always risk 2% of equity per trade) scales naturally and is what most professional traders use. Combined with a defined stop-loss, this caps your loss per trade to a known percentage of your account. Kelly-fraction sizing is more aggressive and mathematically optimal but often too volatile in practice — most traders use half-Kelly or quarter-Kelly.

Volatility-based sizing (like ATR-based) adjusts position size based on the current volatility of the instrument. In quiet markets you trade larger; in choppy markets you trade smaller. This is elegant because it normalizes risk across different symbols and market regimes.

The single most important sizing rule: never risk enough on one trade to prevent you from continuing to trade. A 20% loss requires a 25% gain to recover. A 50% loss requires 100%. Your sizing should assume you'll be wrong many times in a row — and still have enough capital to keep going. When in doubt, size smaller.