Risk management and position sizing
Entry rules get the attention, but position size decides whether a strategy survives its bad years.
Drag across the chart to read values
Fixed-fractional sizing
Risk a fixed fraction of equity, often 0.5% to 2%, on each trade. The distance to the stop-loss determines how many units to buy:
units = (equity × risk %) / (entry price − stop price)Example: equity 20,000, risk 1%, entry 50, stop 47. Units = 200 / 3 = 66. Try your own numbers in the position size calculator.
Volatility sizing
Instead of a fixed stop, size by the Average True Range (ATR), so that each position contributes a similar amount of daily volatility. Quiet instruments get larger positions and volatile ones smaller.
The Kelly criterion
For a bet with win probability p and payoff ratio b, the growth-optimal fraction of capital is:
f* = p − (1 − p) / bFull Kelly is extremely aggressive and very sensitive to errors in p and b. Practitioners who use it at all typically bet a quarter to a half of the Kelly fraction.
Drawdown arithmetic
| Loss | Gain needed to recover |
|---|---|
| 10% | 11.1% |
| 25% | 33.3% |
| 50% | 100% |
| 75% | 300% |
The asymmetry is why limiting large losses matters more than maximising the average return.
Correlation
Five positions in five technology stocks are closer to one large position than to five independent ones. Measure risk at the portfolio level, not per trade.