Fixed Fractional Position Sizing

Fixed Fractional Position Sizing

Fixed fractional position sizing is the most widely used risk-based position sizing method. You risk a fixed percentage of your capital on every trade, with the position size adjusted to keep the dollar risk constant.

Formula

position_size = capital × risk_per_trade / stop_loss_pct

Where:

• capital — total trading capital
• risk_per_trade — fraction of capital to risk (e.g., 0.02 = 2%)
• stop_loss_pct — distance from entry to stop loss as a fraction (e.g., 0.05 = 5%)

Intuition

If you're willing to lose 2% of $100,000 =$2,000, and your stop is 5% below entry, you can buy a position worth $2,000 / 0.05 =$40,000.

Example

• Capital = $100,000
• Risk per trade = 2%
• Stop loss = 5%
• Position size = 100,000 × 0.02 / 0.05 = $40,000

Tighter stops → larger positions (same dollar risk).
Wider stops → smaller positions.