Position sizing: fixed-fractional and volatility models
Two practical ways to decide how many lots to trade, with worked numbers, and why size matters more than the entry.
Fixed-fractional sizing
Fixed-fractional sizing risks the same share of your account on each trade, often 1 or 2 percent. Suppose your account is 10,000 dollars, you risk 1 percent (100 dollars), and your stop is 50 pips away on a pair where one pip is worth 10 dollars per standard lot. Lots = risk / (stop in pips x pip value) = 100 / (50 x 10) = 0.20 lots.
Volatility-based sizing
Volatility-based sizing sets the stop distance from a measure of recent movement, such as the average true range (ATR). If the 14-day ATR is 40 pips and you use a stop of twice the ATR, the stop is 80 pips. With the same 100 dollars at risk, lots = 100 / (80 x 10) = 0.125 lots. Quiet pairs get larger positions and volatile pairs get smaller ones for the same risk.
Why size matters more than the entry
Two traders with the same signals can have very different results because of size. Oversized positions turn ordinary drawdowns into account-threatening ones, and undersized positions may never recover costs. Decide your sizing rule before you trade, write it down, and apply it to every position, including the rungs of a ladder.
Key takeaways
- Fixed-fractional sizing keeps the money at risk constant as a percentage of the account.
- Volatility-based sizing adapts the position to how far price typically moves.
- Write down your sizing rule and apply it to every rung.