Definition
Position sizing
Position sizing converts a fixed risk budget into an order quantity. Definition, the fixed-fractional formula, and why leverage should be an output rather than a setting.
Position sizing is the rule that determines how much of an asset to buy or sell for a given trade. Under fixed-fractional sizing — the standard systematic approach — you fix the loss you are willing to take as a percentage of equity, divide it by the distance between entry and stop, and the quantity falls out. The loss is then decided before the trade opens rather than discovered afterwards.
- Also known as
- fixed-fractional sizing · money management
How it is calculated
Risk amount = Equity × Risk % per trade
Position size = Risk amount ÷ |Entry − Stop|
Implied leverage = (Position size × Entry) ÷ Equity
Worked example: 1% risk on $10,000 with a $2,600 stop distance → $100 ÷ $2,600 = 0.0385 units, 0.25× implied leverage.
It matters more than entry timing
A profitable edge applied with erratic sizing produces an equity curve dominated by the largest positions rather than by the edge. Fixed-fractional sizing makes every failed trade cost the same, which is the precondition for a statistical advantage to become visible across a series instead of being drowned by variance in position scale.
Leverage falls out of it
When quantity comes from the stop distance, leverage is simply notional divided by equity — a figure you read afterwards. If it exceeds what a venue permits, the constraint is genuine information: the intended stop and the risk budget are incompatible, and one of them has to change before the order is sent.
How it gets misread
Sizing is often treated as a fixed quantity per trade — "always 0.1 BTC". That applies wildly different losses to trades with different stop distances, so the account is exposed to the width of the stop rather than to the size of the risk budget.
Sources
- A New Interpretation of Information Rate — Bell System Technical Journal (AT&T); PDF hosted by Princeton University
- Good and bad properties of the Kelly criterion — MacLean, Thorp & Ziemba working paper (1 January 2010), hosted by the UC Berkeley Department of Statistics
- PS19/18: Restricting contract for difference products sold to retail clients — Financial Conduct Authority (UK)
Definitions are educational. Nothing here is investment advice, and no metric described on this page predicts future results.
Definitions are the easy part
Knowing what drawdown means is not the same as having a system that halts on it. QANTERION applies these limits while a strategy runs.