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Position sizing models determine how a risk budget becomes a tradable quantity. The appropriate model depends on the instrument, strategy distribution, evidence quality, account rules, and tolerance for drawdown.

Comparison

Fixed units

Trading the same number of units is operationally simple, but the actual risk changes when the stop distance, tick value, or volatility changes. It is appropriate only when that changing risk is understood and acceptable.

Fixed monetary and percentage risk

A fixed currency amount keeps the initial planned loss constant. A percentage of current equity reduces the currency amount after losses and increases it after gains. Neither method accounts for correlation on its own.

Volatility-based sizing

Volatility sizing reduces the position when the chosen volatility measure rises. It can make risk more comparable across instruments, but recent volatility may understate a sudden regime change or gap.

Kelly sizing

Kelly estimates the fraction that maximizes long-run logarithmic growth under known, stable probabilities and payoffs. Those inputs are uncertain in trading. Fractional Kelly reduces sensitivity but can still be incompatible with practical drawdown limits.

Layer the constraints

A robust process can calculate several limits and use the smallest result:
  1. strategy position size;
  2. monetary or percentage risk cap;
  3. trade-idea capacity;
  4. total open-risk capacity;
  5. remaining daily and maximum-loss buffer;
  6. market-liquidity or minimum-contract constraint.
This makes position sizing an account decision, not only a per-ticket calculation.

Fixed vs percentage risk

Compare the behavior of two common models.

Kelly criterion

Review assumptions and estimation risk.

Risk per trade idea

Add a concentration limit across positions.

Position sizing basics

Start with the stop-based calculation.