Position Sizing 101: The Mathematics of Staying in the Game

Ask a room of traders what matters most and most will say entries. Ask the ones still trading after a decade and they will say sizing. A mediocre entry with professional sizing survives to trade tomorrow; a brilliant entry with reckless sizing eventually meets the one loss that ends the account. Position sizing is not a detail of your strategy — it is the strategy's immune system.

The fixed-fraction method

The professional standard is simple: risk a fixed percentage of current equity on every trade — most desks use 0.5–2%. The formula is: position size equals risk capital divided by stop distance. Worked example: a $10,000 account risking 1% has $100 of risk capital. On a gold trade with a 25-dollar stop, that is four ounces — because 4 × $25 equals the $100 you have agreed to lose. Nothing else about the trade changes the size.

Two properties make this powerful. Risk shrinks automatically during drawdowns, so losing streaks decay geometrically instead of collapsing linearly. And size grows with the account, compounding gains without any change in behaviour.

What about Kelly?

The Kelly criterion computes the mathematically optimal bet size from your win rate and payoff ratio — and it is genuinely optimal in theory. In practice it demands accurate knowledge of your own edge, which is exactly what traders overestimate. Full-Kelly sizing produces drawdowns most humans cannot psychologically survive. Professionals who use Kelly at all typically trade a quarter or half of it.

Sizing rules worth engraving

Never increase size to recover a loss. Recalculate size from current equity before every trade, not from the equity you remember. And cap your total portfolio heat — the sum of open risk across all positions — so that a single correlated shock cannot take out more than a predefined slice of the account. Survival first; the returns are a by-product.