Fixed fractional position sizing is the most widely used risk management method among professional traders. It is simple to understand, easy to implement, and protects your capital during losing streaks while allowing growth during winning periods. This guide explains everything you need to know.
What is Fixed Fractional Position Sizing?
Fixed fractional position sizing means risking a constant percentage of your account on every trade. If you decide to risk 2% per trade, you risk exactly 2% whether your account is $10,000 or $100,000.
The core principle: Risk the same percentage of your current account balance on every trade, regardless of past wins, losses, or how confident you feel.
The Fixed Fractional Formula
The formula has two steps:
Step 1: Calculate Dollar Risk
Dollar Risk = Account Balance x Risk Percentage
Example: $50,000 x 2% = $1,000
Step 2: Calculate Position Size
Position Size = Dollar Risk / Risk Per Share
Example: $1,000 / $5 per share = 200 shares
Complete Example Walkthrough
Let us work through a detailed example:
Trading Setup
- Account Balance: $25,000
- Risk Percentage: 1.5%
- Stock: XYZ trading at $80
- Entry Price: $80
- Stop Loss: $76
Calculation
- Dollar Risk: $25,000 x 1.5% = $375
- Risk Per Share: $80 - $76 = $4
- Position Size: $375 / $4 = 93 shares
- Total Position Value: 93 x $80 = $7,440
Why Fixed Fractional Works
This method has several built-in advantages:
1. Automatic Position Adjustment
As your account grows, your position sizes grow proportionally. As your account shrinks, positions automatically get smaller. This is anti-martingale behavior.
- Account at $30,000, 2% risk = $600 per trade
- Account at $25,000, 2% risk = $500 per trade
- Account at $20,000, 2% risk = $400 per trade
2. Mathematically Impossible to Blow Up
If you truly risk only a fixed percentage, you can never lose 100% of your account. After 10 consecutive losses at 2% risk, you still have 81.7% of your starting capital.
3. Compounding During Winning Streaks
When you win, your next position is larger in absolute terms, allowing for geometric growth.
Choosing Your Risk Percentage
The right percentage depends on your trading style and risk tolerance:
- 0.25% to 0.5%: Very conservative, good for new traders or uncertain strategies
- 0.5% to 1%: Conservative, recommended for most traders
- 1% to 2%: Moderate, common among experienced traders
- 2% to 3%: Aggressive, only for proven strategies
- Above 3%: Very risky, not recommended
Recommendation: Start at 0.5% to 1% until you have at least 50 trades with your strategy. You can always increase later once you have confidence in your edge.
Drawdown Analysis by Risk Percentage
Understanding potential drawdowns helps you choose the right percentage:
After 10 Consecutive Losses
- 1% risk: Account at 90.4% of starting value
- 2% risk: Account at 81.7% of starting value
- 3% risk: Account at 73.7% of starting value
- 5% risk: Account at 59.9% of starting value
Ten losses in a row is rare but possible. Choose a risk level where you can handle that scenario.
Fixed Fractional vs Other Methods
Vs. Fixed Dollar Risk
Fixed dollar (risking $500 per trade regardless of account size) does not adjust as your account changes. Fixed fractional is superior for long-term growth.
Vs. Kelly Criterion
Kelly is mathematically optimal but requires accurate win rate and reward-risk estimates. Fixed fractional is simpler and more robust to estimation errors.
Vs. Optimal f
Optimal f maximizes geometric growth but leads to severe drawdowns. Fixed fractional with 1-2% risk is much smoother.
Implementing Fixed Fractional in Practice
For Stock Traders
- Determine your stop loss before entering
- Calculate risk per share (entry minus stop)
- Calculate dollar risk (account x percentage)
- Divide dollar risk by risk per share
- Round down to whole shares
For Options Traders
For defined-risk options (long options or spreads):
- Determine maximum loss per contract
- Calculate dollar risk (account x percentage)
- Divide dollar risk by max loss per contract
- Round down to whole contracts
Options Example
- Account: $30,000
- Risk: 2% = $600
- Put credit spread max loss: $350 per contract
- Contracts: $600 / $350 = 1.7, round to 1 contract
Common Mistakes to Avoid
- Increasing risk after losses: Stick to your percentage, do not try to "make it back"
- Decreasing risk after wins: Let your position sizes grow with your account
- Calculating on outdated account value: Use current balance, not starting balance
- Ignoring correlated positions: Five 2% positions in similar stocks is one 10% position
- Rounding up: Always round down your position size
Automate Your Position Sizing
Pro Trader Dashboard calculates fixed fractional position sizes automatically based on your account and risk settings. Focus on finding good trades while the math is handled for you.
Summary
Fixed fractional position sizing is simple, effective, and used by most professional traders. Pick a percentage you can stomach (start with 1%), apply it consistently, and let the math protect your capital. It is not the absolute optimal method, but it is robust, easy to follow, and keeps you in the game long enough for your edge to compound.
Ready to explore more advanced methods? Learn about Kelly Criterion for mathematically optimal sizing or volatility-based sizing for market-adaptive positioning.