Fixed fractional sizing: the trader's default

The most important formula in trading

Fixed fractional sizing is the default for almost every professional trader, and it's where this chapter starts. The idea: instead of picking a position size by feel, you pick a percentage of your account to risk on every trade. Most beginners learn 1%. We'll revisit that number later in the chapter, but the structure of the rule is what matters first.

Here's the formula. Position size = (account equity × risk percent) / stop distance. Say your account is $500 and you want to risk 1% per trade. That's $5 of risk. If your stop is 50 pips away on a forex trade and each pip is worth $0.10 on a micro lot, your stop distance in dollars is $5 per micro lot. $5 risk divided by $5 stop = 1 micro lot. Boring, precise, repeatable.

Why traders love fixed fractional. First, it scales with you. Win five trades and grow the account to $600, your 1% risk is now $6, and your next trade is automatically larger. Lose three and drop to $450, your risk is now $4.50, and your size is automatically smaller. The math handles the throttle for you. Second, it makes blow-ups arithmetically hard. Even ten losing trades at 1% only takes you to roughly $452 — painful, but very far from zero.

The catch is friction. You have to recompute size every trade. On a $500 account, lot sizes round funny — a 1% risk on a tight stop might call for 1.4 micro lots, and you'll have to round down to 1. That rounding error is real, but it's tiny compared to the cost of guessing your size. Recap: pick a percent, lock in the formula, recompute every trade.