Position Sizing
Category
Performance-Analyse & Journaling
Sub-category
Performance-Kennzahlen
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Last reviewed
Position sizing determines how many units of an instrument a trader buys or sells – derived from account risk and stop distance, not gut feeling. The core formula: position size = account risk ÷ stop distance per unit. It makes losses plannable and comparable (1R logic) and is the lever through which risk management is practically implemented – more important than any entry signal.
Context & Mechanics
The core formula
Position sizing answers the question “how much?” after the questions “what?” and “in where, out where?”. The calculation runs backwards: first the account risk is fixed (commonly 0.5–2% of capital, often less on prop-firm accounts because of daily loss limits), then the stop distance is determined from market structure (e.g. below the last swing low or via ATR) – and from that the size: position size = account risk ÷ stop distance per unit. A tight stop automatically means a larger position, a wide stop a smaller one – the currency risk stays constant.
The 1R logic
This constant risk amount is called 1R. It makes trades comparable: a 3R profit is three times the capital risked, regardless of instrument and position size. Only through constant R does a strategy become statistically evaluable (expectancy, profit factor) – anyone risking sometimes 0.5%, sometimes 5% can read nothing reliable from their trade history because a single outlier dominates the result.
Variants and limits
Fixed fractional (a fixed percentage of current capital) is the standard: positions shrink automatically in drawdowns and grow with the account. More aggressive models like Kelly theoretically maximise growth but create drawdowns that are psychologically almost impossible to endure – hence at most fractional Kelly is common. Additionally, professionals cap the total risk of correlated positions: five trades in similar markets at 1% each are a 5% cluster risk under stress.
Why it matters for traders
Position sizing is the point where risk management turns from theory into action – and with prop-firm rules (daily loss limit, max drawdown) the only lever that can mathematically rule out rule violations. In the GlanWick simulator, the size calculation can be played through by way of example without real capital – GlanWick is a training and simulation tool and not a prop firm itself.
Execution Example
A trader with a $50,000 account risks 1% per trade ($500 = 1R). A stock offers a long setup: entry $80.00, stop below the swing low at $78.00.
- Stop distance: 80.00 − 78.00 = $2.00 per share.
- Position size: $500 ÷ $2.00 = 250 shares → position value $20,000 (40% of the account, feasible without leverage).
- Control calculation: a stop execution at $78.00 costs 250 × $2.00 = $500 = exactly 1R = 1% – regardless of how “convincing” the setup looks.
- Comparison setup: the same stock with a tighter stop at $79.20 ($0.80 distance) would yield 625 shares – a larger position, identical risk. The currency risk drives the size, not the other way round.
Execution Risk & Errors
Determining position size by gut feeling or conviction instead of formula
Increasing risk on “sure” setups and thereby destroying the 1R statistics
Moving the stop wider after entry so real risk exceeds the planned size
Sizing correlated positions individually and overlooking cluster risk
Increasing size after losses (“martingale”) to recover losses faster
Frequently Asked
What percentage should I risk per trade?
Common is 0.5–2% of capital. On prop-firm accounts with a daily loss limit you calculate backwards: the daily limit should be unreachable even after several consecutive losing trades – which often leads to 0.25–0.5% per trade.
What does 1R mean?
1R is the fixed risk amount per trade (e.g. $500 at 1% of a $50,000 account). Profits and losses are measured as multiples of it: +3R, −1R. This makes trades comparable across instruments and periods.
Why does a tighter stop yield a larger position?
Because the currency risk stays constant: position size = account risk ÷ stop distance. If the stop distance halves, the number of units doubles – the potential loss remains identical as long as the stop is respected.
What is the difference between position sizing and the Kelly criterion?
The Kelly criterion is a specific sizing model that maximises growth rate – with brutal drawdowns. Fixed fractional (a fixed percentage) is the robust standard model; Kelly serves more as a theoretical upper bound of which professionals use only a fraction.