Fixed-fractional position sizing means budgeting a constant percentage of current account equity as the planned risk on each trade. The percentage stays fixed; the dollar amount changes as the account gains or loses value.
If your rule is to risk 1% per trade, a $20,000 account has a $200 risk budget. At $18,000, that budget falls to $180. This connects individual trade decisions to the broader task of position sizing and capital allocation, without requiring every position to contain the same number of shares or contracts.
The distinction matters: fixed-fractional sizing controls a calculated risk budget, not the actual loss under every possible market condition.
What Stays Fixed, and What Changes?
In the stop-based version covered here, the fixed fraction applies to the estimated loss between entry and the planned exit, with an allowance for trading costs. It does not describe the percentage of your account spent buying the position.
Consider a $20,000 account with a 0.75% risk rule. Its trade budget is $150. Buying $150 of stock would allocate 0.75% of equity to the investment, but that is not the same calculation as risking $150 between an entry price and a stop.
The position could have a market value of several thousand dollars while its planned stop-based loss remains $150. Conversely, a small position can carry more risk than expected if its exit is far from entry.
Two inputs therefore drive the calculation: the account risk budget and the estimated loss per unit. Both belong in the sizing decision; CME Group’s position-sizing lesson connects position size to the chosen stop and the amount of account equity put at risk.
The Fixed-Fractional Position-Sizing Formula
The basic calculation is:
Trade risk budget = Current account equity × Risk fraction
Position size = Trade risk budget ÷ Estimated loss per unit
Round the result down to a permitted trading increment. For a stock position without cost adjustments, estimated loss per share is the absolute difference between entry and stop prices. For derivatives, convert the price distance into a monetary amount using the contract’s value per point or tick.
A Worked Stock Example
Suppose the following figures are hypothetical:
- Current account equity: $20,000
- Risk fraction: 0.75%, or 0.0075
- Entry price: $50
- Planned stop price: $48.50
The trade risk budget is $20,000 × 0.0075 = $150. The entry-to-stop distance is $1.50 per share, so the calculated position is $150 ÷ $1.50 = 100 shares.
Those shares have a purchase value of $5,000, or 25% of account equity. The planned price loss is still $150, assuming entry at $50 and exit at $48.50. Purchase value and planned risk measure different things.
If the stop distance doubles to $3, the calculated position falls to 50 shares. A wider stop requires fewer shares to preserve the same dollar risk budget.
Include Costs Before Rounding
Commissions, transaction charges and an allowance for slippage consume part of that budget. Where costs can reasonably be separated into fixed and per-unit amounts, use:
Position size = (Risk budget − Fixed costs) ÷ (Price risk per unit + Variable cost allowance per unit)
Suppose the example trade has hypothetical round-trip fixed costs of $10 and a further cost allowance of $0.05 per share. The calculation becomes ($150 − $10) ÷ ($1.50 + $0.05) = 90.32 shares.
Rounding down gives 90 shares, with a modeled loss including those allowances of $149.50. This is a budgeting estimate, not a guarantee that execution costs will stay within the allowance.
Applying the Calculation to Futures and Forex
The arithmetic stays the same across instruments, but the unit of risk changes.
For a hypothetical futures contract worth $5 per tick, a stop 12 ticks from entry represents $60 of price risk per contract. A $150 budget permits two contracts before costs, using $120 of the budget. Three contracts would require $180 and exceed it.
There is no requirement to use every dollar of the allowance. If one contract already exceeds the budget, the calculation calls for no trade in that contract size. A smaller contract may fit; rounding up does not.
For forex, calculate monetary risk from stop distance and pip value, then express it in the account currency. The guide to forex pip values and position sizes covers that conversion.
Check funding and margin separately. A position that fits the stop-based risk budget may still require more cash or margin than the account can provide. Permission to open a position does not establish that its risk is acceptable.
How Profits and Losses Change the Next Position
“Fixed” describes the fraction, not the dollar budget or position size. Recalculate from the equity figure defined in your trading plan rather than repeatedly using the original deposit.
With the same 0.75% rule, $18,000 of equity produces a $135 budget. At the earlier $1.50 risk per share, that permits 90 shares before costs. At $22,000 of equity, the budget becomes $165 and permits 110 shares.
This expansion or contraction in share count assumes the loss per share stays unchanged. If the next trade needs a wider stop, its position can be smaller even after the account has grown.
Specify how equity is measured. Account balance generally reflects completed transactions, while current equity also reflects unrealized gains and losses on open positions. Using stale equity can overstate the next budget when existing positions are losing money. Also define when the figure is refreshed and how deposits or withdrawals affect it.
The Mathematics of a Losing Streak
In an idealized model, each loss removes exactly the selected fraction of the equity available immediately before that trade. After n consecutive losses:
Remaining equity = Starting equity × (1 − f)n
Here, f is the risk fraction expressed as a decimal. The table shows the resulting declines from starting equity, assuming sequential trades, exact fractional sizing and no additional costs or cash flows.
| Consecutive losses | 1% risk per trade | 2% risk per trade | 5% risk per trade |
|---|---|---|---|
| 5 | 4.90% | 9.61% | 22.62% |
| 10 | 9.56% | 18.29% | 40.13% |
| 20 | 18.21% | 33.24% | 64.15% |
The shrinking dollar budget slows capital depletion, but it does not make a large fraction harmless. Twenty losses at 5% leave about 35.85% of starting equity. The account is smaller, and so is the dollar amount available for subsequent trades.
Recovery also requires a larger percentage gain than the preceding percentage loss. After the modeled 33.24% decline at 2% risk, returning to the starting balance requires approximately 49.79%. The separate explanation of drawdown recovery mathematics develops that relationship.
Choosing a Risk Fraction
There is no percentage that suits every strategy or account. The familiar 2% rule is a convention, not a mathematical safety threshold. CME Group’s discussion of the 2% rule explicitly identifies that threshold as arbitrary.
A useful starting question is not “How much can this trade make?” but “What happens if the next several trades fail?” Compare candidate fractions against losing streaks, adverse execution and the amount of drawdown you can afford financially.
Historical results can inform that exercise, but the longest past losing streak is not a ceiling on future losses. Test worse outcomes rather than treating the backtest as a promise.
For a strategy with little reliable evidence, a smaller fraction reduces the money exposed while its behavior is assessed. That does not make the strategy profitable. Increasing size magnifies its outcomes; it does not repair weak trade selection.
What Fixed-Fractional Sizing Does Not Control
Execution Beyond the Planned Stop
A stop price is not a guaranteed exit price. In stock trading, a standard stop becomes a market order when triggered, and the execution price can differ sharply from the trigger. A stop-limit order constrains the execution price but may remain unfilled. These distinctions are set out in FINRA’s guidance on stop-order risks.
Return to the 100-share example. If the shares bought at $50 exit at $46 rather than $48.50, the price loss is $400 before costs, not $150. The position followed the original sizing calculation, but the realized loss exceeded its assumptions.
Do not move the stop closer simply to squeeze a larger position into the budget. Choose an exit that fits the trade’s premise, then calculate size. If that size is impractical, reducing the risk budget or skipping the trade preserves the rule more honestly than changing its inputs to obtain a preferred answer.
Combined Exposure Across Open Trades
Four trades each budgeted at 0.75% of the same equity figure create a combined planned loss of 3%, before execution differences. They are not four independent safety allowances.
Positions in the same sector or linked to the same economic event may lose together. Holding several instruments does not automatically provide diversification, particularly where their exposures overlap. The SEC’s asset allocation and diversification guidance makes that distinction clear.
Set a separate ceiling for combined open risk and related exposures. Adding to an existing position must also pass that combined test; splitting an exposure into several order tickets does not reduce its economic size.
Fixed Fractional Versus Other Sizing Methods
Fixed-dollar risk keeps the planned monetary loss unchanged. Risking $200 represents 1% of a $20,000 account, but 2% after equity falls to $10,000. Fixed-fractional sizing instead reduces the budget to $100 if the chosen fraction remains 1%.
Fixed-notional sizing keeps the market value of each position constant. It does not keep stop-based risk constant: a $5,000 stock position with a 2% stop distance has different planned risk from one with a 6% stop distance.
Kelly sizing uses estimated probabilities and payoffs to calculate a growth-oriented fraction. A fixed-fractional rule can operate without estimating those inputs, although that also means it makes no claim to identify an optimal fraction. The Kelly criterion and its estimation risks require separate treatment.
A Practical Sizing Process
Make the calculation repeatable before placing an order:
- Establish current equity and available risk capacity. Include existing positions and any portfolio risk ceiling.
- Define the planned exit. Measure the monetary loss per share, contract or permitted lot increment.
- Deduct cost allowances and round down. Confirm the resulting position also meets cash, margin and exposure constraints.
- Record the outcome. Compare planned risk with the actual loss or gain, including execution costs.
If the budget cannot cover the smallest permitted position and its costs, skip the trade. The fraction is a ceiling, not a spending target.
Review repeated differences between planned and realized losses. A spreadsheet that assumes every exit occurs precisely at the stop can make the rule appear more protective than actual execution supports.
Fixed-fractional sizing provides a consistent connection between account equity and trade risk. It does not eliminate the risk of losing trading capital. Its practical value depends on realistic loss estimates, disciplined recalculation and a separate check on the positions already open.