Position Sizing Cheat Sheet

Goal:
Keep losses small, stay emotionally stable, and let your edge compound.
Sizing > prediction.

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1. Fixed % Risk per Trade (Fixed Fractional)

Idea: Risk a fixed % of your account on each trade.

• Typical risk per trade: 0.25–1.0% of equity.

Formula:

• Account size = E
• Risk per trade (%) = r
• Money at risk = R = E × r
• Entry price = P_entry
• Stop price = P_stop
• Risk per share = ΔP = |P_entry − P_stop|
• Position size (shares) = N = R ÷ ΔP

Example:

• E = 100,000
• r = 0.5% = 0.005 → R = 500
• P_entry = 50, P_stop = 47 → ΔP = 3
• N = 500 ÷ 3 ≈ 166 shares

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2. ATR-Based Position Sizing

Idea:
Use volatility (ATR) to determine how “wide” your stop is. More volatile → smaller size.

• ATR = Average True Range (e.g. 14-day ATR)
• Choose ATR multiple for stop: k (e.g. 1×, 1.5×, 2×)

Formula:

• Account size = E
• Risk per trade (%) = r
• Money at risk = R = E × r
• ATR = ATR
• Stop distance = ΔP = k × ATR
• Position size = N = R ÷ ΔP

Example:

• E = 100,000, r = 0.5% → R = 500
• ATR = 1.5, k = 1.5 → ΔP = 2.25
• N = 500 ÷ 2.25 ≈ 222 shares

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3. Volatility Targeting (Per Position)

Idea:
Each position contributes a target volatility to the portfolio.

• Target annualized vol for the position = σ_target (e.g. 10–15%)
• Asset’s annualized vol = σ_asset
• Fraction of capital you’re willing to allocate to this idea = f_alloc (0–1)

Formula (simple version):

1. Volatility weight:
   w_vol = σ_target ÷ σ_asset
   (If σ_asset > σ_target, you hold less.)
2. Position value:
   V_position = E × f_alloc × w_vol
3. Position size:
   N = V_position ÷ P_entry

Example:

• E = 100,000
• σ_target = 10%, σ_asset = 30% → w_vol = 10 ÷ 30 ≈ 0.33
• f_alloc = 0.5 (max 50% of equity into this idea)
• V_position = 100,000 × 0.5 × 0.33 ≈ 16,667
• P_entry = 50 → N ≈ 16,667 ÷ 50 ≈ 333 shares

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4. Regime-Based Sizing (Dynamic Multiplier)

Idea:
Adjust size based on volatility/trend regime.

Example rule:

• Low vol + strong trend → multiplier m = 1.3
• Normal vol + mixed trend → m = 1.0
• High vol + choppy → m = 0.5

Implementation:

1. Compute base size with one of the methods above (e.g. fixed % risk).
2. Apply multiplier: N_final = N_base × m.

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5. Practical Defaults (Good Starting Point)

• Risk per trade: 0.25–0.50% of equity
• Stop: 1–2× ATR
• Max total risk (all open trades): 2–3% of equity
• Cut size in half when volatility spikes or you’re in a drawdown

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6. Core Principle

Correct sizing keeps you in the game.
Prediction only matters if you survive long enough to use it.