# Fixed Fractional

Also known as: percent-risk.
A Risk, Sizing & Exits concept (Position sizing) in the LuxAlgo Library, with 1 indicator implementation.

## What is Fixed Fractional?

Fixed fractional, also called percent-risk sizing, risks the same fraction of current equity on every trade. Size is back-solved from the stop: equity times the risk fraction, divided by the per-unit distance from entry to stop. A $50,000 account risking 1% commits $500; with a stop $2 away, that is 250 shares. Its theoretical ancestor is the Kelly criterion, which derives the growth-optimal fixed fraction when the odds are known; full Kelly is widely considered too aggressive for live trading precisely because real odds are estimated, not known.

Because the fraction applies to current equity, dollar risk compounds upward after gains and contracts through drawdowns: each consecutive loss removes a slightly smaller dollar amount than the one before. That geometric damping is the method's appeal, not a safety guarantee, since gaps and slippage can take more than the budgeted fraction. The rule also says nothing about where stops belong. It converts a stop distance into a size, so it complements a stop rule rather than replacing one.

The arithmetic of the damping is worth internalizing. Ten consecutive 1% losses leave about 90.4% of the account, not 90%, because each loss bites a smaller base; at 2% the same streak leaves about 81.7%. The asymmetry runs the other way on recovery: a 20% drawdown needs a 25% gain to repair, a 50% drawdown needs 100%, which is the quantitative case for small fractions. The aggressive end of the family exists too: Ralph Vince's optimal f derives the fraction that maximized historical growth from the largest recorded loss, and its practical reputation is that trading anywhere near it produces drawdowns almost nobody survives psychologically.

In practice the rule lives inside scaffolding. The stop distance it divides by comes from somewhere, a [structure stop](https://www.luxalgo.com/library/concept/structure-stop/), a volatility multiple, or a [fixed stop](https://www.luxalgo.com/library/concept/fixed-stops/) rule, and the choice changes the sizes more than the fraction does; calculators and dashboards like the Library's risk-management tools automate the conversion. Above the single trade sit the aggregate constraints: [loss-control rules](https://www.luxalgo.com/library/concept/loss-control-rules/) capping daily or total open risk, so five concurrent 1% positions do not quietly become a 5% correlated bet. The fraction is the atom; the risk plan is the molecule.

## How to apply fixed fractional sizing

One formula, applied with discipline about what feeds it.

1. Fix the fraction: a constant percentage of current equity risked per trade, with small single-digit percentages the practitioner norm.
2. Take the stop distance from your stop methodology, structural or volatility-based, in price terms per unit.
3. Compute the size: equity times fraction, divided by stop distance times per-point value, rounded down to the tradable increment.
4. Recompute from current equity as the account changes, which is what makes the risk geometric rather than fixed-dollar.
5. Enforce the aggregate layer: cap the sum of open fractions and correlated exposure, since the per-trade rule alone cannot see the portfolio.

## How traders use it

- As the per-trade risk cap in rule-based plans: fix the fraction, derive size from the live stop distance, and every trade risks one comparable unit, which is what makes [R-multiple](https://www.luxalgo.com/library/concept/r-multiple-framework/) records meaningful.
- As the sizing layer behind stop logic: the method needs a distance as input, so it pairs with a [structure stop](https://www.luxalgo.com/library/concept/structure-stop/) or an ATR-based distance instead of standing alone.
- As the baseline other schemes modify: [volatility-targeted sizing](https://www.luxalgo.com/library/concept/volatility-targeted-sizing/) swaps the stop-distance denominator for a volatility estimate, and portfolio rules cap the sum of open fractions.
- With streak governors: some plans step the fraction down after consecutive losses and restore it on recovery, stacking an explicit brake on top of the rule's built-in geometric damping.
- In scaling plans: [pyramiding](https://www.luxalgo.com/library/concept/pyramiding/) adds are budgeted from the position's original fraction rather than fresh allocations, so a built-up winner cannot quietly carry several trades' worth of risk.

## Fixed fractional vs related sizing rules

- **Sizing Bases** (https://www.luxalgo.com/library/concept/sizing-bases/): Sizing bases is the taxonomy, risk-based versus notional, compounding versus static; fixed fractional is one specific member: percent of current equity, risk-based and compounding. Naming the family clarifies what the rule holds constant and what it deliberately lets drift.
- **Volatility-targeted Sizing** (https://www.luxalgo.com/library/concept/volatility-targeted-sizing/): Volatility targeting replaces the stop-distance denominator with a volatility estimate, sizing positions so each contributes similar variance. It answers a portfolio-construction question; fixed fractional answers a per-trade loss-bounding question. Many desks run both, one per layer.
- **DCA** (https://www.luxalgo.com/library/concept/dca/): Dollar-cost averaging sizes by calendar, equal notional per interval, with no stop and no risk fraction anywhere in the math. It is an accumulation schedule for unleveraged assets, not a trade-risk rule, and importing it into leveraged trading without a separate loss bound is how schedules become blowups.

## FAQ

### How much should I risk per trade with fixed fractional?

There is no universally correct fraction. Small percentages are the norm in practice because recovery is asymmetric: the gain needed to climb out of a drawdown grows faster than the drawdown itself, so the hole left by a string of 2% losses takes disproportionately more gain to refill than the hole left by the same string at 0.5%. The honest inputs are your worst plausible losing streak, your leverage limits, and the drawdown you can genuinely sit through.

### What is the difference between fixed fractional and fixed lot sizing?

Fixed lot trades the same number of shares or contracts every time, so dollar risk swings with every stop distance and never adapts to the account. Fixed fractional recomputes size from current equity and the live stop, holding percentage risk constant instead. The first is simpler to execute; the second keeps one losing trade from meaning different things at different account sizes.

### How does fixed fractional relate to the Kelly criterion?

Kelly is the theoretical ceiling: given known win probability and payoff, it derives the fraction that maximizes long-run growth. Fixed fractional borrows the constant-fraction structure while abandoning the optimality claim, because live odds are estimates and Kelly overbets brutally when estimates err high. Practitioners who use Kelly at all typically trade a fraction of it, half-Kelly or less, which lands them back in ordinary percent-risk territory.

### What is optimal f?

Ralph Vince's construction: the fixed fraction that would have maximized geometric growth over a strategy's historical trade sequence, anchored to its largest recorded loss. It is mathematically interesting and practically radioactive, since trading at or near optimal f produces drawdowns well beyond what most traders tolerate, and the estimate collapses if a future loss exceeds the historical worst. Its main use is as an upper bound you deliberately stay far below.

### Does fixed fractional sizing prevent ruin?

It makes formal ruin arithmetically remote, since risking a fraction of a shrinking base approaches zero rather than crossing it, but that is the theory, not the trade. Gaps, slippage and correlated positions can each take more than the budgeted fraction, and practical ruin, a drawdown deep enough to stop you trading, arrives long before mathematical ruin. The rule shrinks and smooths the losses; the plan around it handles the tails.

### Should the fraction ever change?

Deliberately or not at all. Reasonable schemes step the fraction down in drawdowns or after losing streaks and restore it with recovery, formalizing caution; what corrodes the method is improvising, raising the fraction to chase back losses, which converts a compounding brake into a leverage spiral. Whatever schedule you choose, writing it down before the drawdown is what keeps the decision from being made by the drawdown.

## Implementations in the Library

- Risk Management Tool (LuxAlgo): https://www.luxalgo.com/library/indicator/risk-management-tool/

## Related concepts

- Fixed Ratio: https://www.luxalgo.com/library/concept/fixed-ratio/
- Volatility-targeted Sizing: https://www.luxalgo.com/library/concept/volatility-targeted-sizing/
- Sizing Bases: https://www.luxalgo.com/library/concept/sizing-bases/
- Portfolio-aware Sizing: https://www.luxalgo.com/library/concept/portfolio-aware-sizing/
- Pyramiding: https://www.luxalgo.com/library/concept/pyramiding/
- Averaging Down: https://www.luxalgo.com/library/concept/averaging-down/
- DCA: https://www.luxalgo.com/library/concept/dca/
- Martingale / Anti-martingale: https://www.luxalgo.com/library/concept/martingale-anti-martingale/
- Kelly Criterion: https://www.luxalgo.com/library/concept/kelly-criterion/
- Optimal F: https://www.luxalgo.com/library/concept/optimal-f/

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Source: https://www.luxalgo.com/library/concept/fixed-fractional/ (LuxAlgo Library, the encyclopedia of trading & technical analysis). Free to use with attribution: https://www.luxalgo.com/library/license/