Fixed Fractional

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.

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 records meaningful.
• As the sizing layer behind stop logic: the method needs a distance as input, so it pairs with a structure stop or an ATR-based distance instead of standing alone.
• As the baseline other schemes modify: volatility-targeted sizing swaps the stop-distance denominator for a volatility estimate, and portfolio rules cap the sum of open fractions.