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.

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, a volatility multiple, or a fixed stop 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 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. 1Fix the fraction: a constant percentage of current equity risked per trade, with small single-digit percentages the practitioner norm.
2. 2Take the stop distance from your stop methodology, structural or volatility-based, in price terms per unit.
3. 3Compute the size: equity times fraction, divided by stop distance times per-point value, rounded down to the tradable increment.
4. 4Recompute from current equity as the account changes, which is what makes the risk geometric rather than fixed-dollar.
5. 5Enforce 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 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.
• 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 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