Fixed fractional position sizing

How does fixed fractional position sizing work?

The risk percentage is fixed and the risk amount changes. Before each trade, for example 1% of the current balance is calculated, and the position size is worked out from that amount and the stop distance: position sizing. As the account shrinks, the amount risked per trade shrinks with it, and it grows as the account grows. The 1% rule can be applied this way or fixed to the starting balance: 1% rule.

How does it differ from fixed-amount risk?

With fixed-amount risk, the same sum of money, for example $50, is risked on every trade, so during a drawdown each loss is a larger share of the remaining account. With fixed fractional sizing the risk amount falls with the drawdown, so losses reduce the account more slowly; in return, recovering from a drawdown can also take longer: drawdown.

Worked example

A $5,000 account risking 1% of the current balance risks $50 on the first trade. If that trade loses, the balance falls to $4,950 and the next trade risks $49.50. If the account grows to $6,000, the risk per trade rises to $60.