# Sizing Bases Also known as: equal-R, percent-of-equity, fixed-dollar, notional-vs-risk, leverage rules. A Risk, Sizing & Exits concept (Position sizing) in the LuxAlgo Library, with 1 indicator implementation. ## What are Sizing Bases? A sizing base is the reference quantity a position's size is computed from, and naming it is the first decision in any sizing scheme. Risk-based bases measure loss at the stop: equal-R keeps the same dollar risk on every trade, and percent-of-equity risks a fixed fraction of the current account, the [fixed fractional](https://www.luxalgo.com/library/concept/fixed-fractional/) rule. Notional bases measure exposure instead: a fixed dollar value, fixed lots or shares, or leverage rules that cap position value at a multiple of equity. The distinction that matters most is notional versus risk. A small position with a wide stop can risk more than a large position with a tight one, so a leverage cap and a percent-risk rule constrain different things, and written plans commonly state both. The second axis is compounding: percent-of-equity risk grows and shrinks with the account, while fixed-dollar risk stays constant through win streaks and drawdowns alike, which changes how the same strategy's equity curve behaves. A worked example makes the machinery concrete. A $10,000 account risking one percent budgets $100 per trade; with a stop 50 ticks away on a contract worth $2 per tick, the loss at the stop is $100 per contract, so the size is one contract. Halve the stop distance and the same budget buys two contracts: double the notional, identical risk. That inversion is the point of risk-based sizing, and it is also why the [R-multiple framework](https://www.luxalgo.com/library/concept/r-multiple-framework/) pairs with it so naturally: with every trade risking one R, outcomes measured in R are comparable across instruments, stop widths and account sizes. In the wild, bases are often imposed rather than chosen. Evaluation and prop-firm rules cap daily loss in fixed dollars, pushing traders toward fixed-dollar bases; crypto venues cap leverage, a notional constraint that binds regardless of stop placement; and the stop methodology itself, a [volatility stop](https://www.luxalgo.com/library/concept/volatility-stop/) versus a [structure stop](https://www.luxalgo.com/library/concept/structure-stop/), sets the denominator the risk budget divides by. Dashboards like the Library's position-size calculators and execution desks automate the conversion arithmetic. The failure mode they cannot fix is the unnamed base: sizing by feel, where notional comfort masquerades as risk control until the first wide-stop trade exposes the difference. ## How to identify and apply a sizing base The procedure is the same whatever the base; what changes is which quantity gets held constant. 1. Name the base explicitly: risk-based (equal-R, percent-of-equity) or notional (fixed dollars, fixed units, leverage cap), and whether it compounds with the account. 2. Set the per-trade budget in the base's units: a percent of current equity, a fixed dollar risk, or a notional ceiling. 3. Compute the size: for risk bases, budget divided by stop distance times per-point value; for notional bases, the ceiling divided by price. 4. Check the other constraint: a risk-sized position against the leverage cap, a notional-sized one against the implied loss at its stop, since plans that state only one get surprised by the other. 5. Record the trade in R terms regardless of base, so the journal stays comparable across instruments and stop widths. ## How traders use it - For plan design: pick the base deliberately. Equal-R keeps journal entries comparable and dollar risk constant through streaks, percent-of-equity compounds with the account, and notional bases suit mandates that cap exposure rather than loss at the stop. - For conversion: stop distance and per-point value translate between bases, turning a risk budget into shares or contracts, or a notional cap into the implied loss at the stop. - As the foundation refinements build on: [volatility-targeted sizing](https://www.luxalgo.com/library/concept/volatility-targeted-sizing/) replaces the stop-distance denominator with a volatility estimate, and [portfolio-aware sizing](https://www.luxalgo.com/library/concept/portfolio-aware-sizing/) adjusts the base for correlated open risk. - For expectancy accounting: sizing every trade to one R makes win rate and average R the whole performance story, so strategy comparisons stop being distorted by which trades happened to be sized larger. - In scaling plans: [pyramiding](https://www.luxalgo.com/library/concept/pyramiding/) adds and [scaling out](https://www.luxalgo.com/library/concept/scaling-out/) trims are computed against the remaining risk budget of the whole position, not as fresh standalone trades, which keeps a built-up position from quietly exceeding the base. ## Sizing bases vs related sizing concepts - **Fixed Fractional** (https://www.luxalgo.com/library/concept/fixed-fractional/): Fixed fractional is one specific base, a constant percent of current equity risked per trade. Sizing bases is the taxonomy it lives in, alongside equal-R, fixed-dollar and notional rules; naming the family clarifies what any single rule is actually holding constant. - **Volatility-targeted Sizing** (https://www.luxalgo.com/library/concept/volatility-targeted-sizing/): Volatility targeting swaps the stop-distance denominator for a volatility estimate, sizing so each position contributes similar variance. It answers a portfolio question, equalizing risk contributions, where per-trade bases answer a discipline question, bounding the loss when this stop is hit. - **DCA** (https://www.luxalgo.com/library/concept/dca/): Dollar-cost averaging sizes by schedule, equal notional per interval, with no stop in the arithmetic at all. It is an accumulation policy rather than a trade-risk policy, which is exactly why importing it into leveraged trading without a separate loss bound ends badly. ## FAQ ### What is the difference between notional size and risk? Notional is the market value the position controls; risk is the expected loss if the stop is hit, distance times size. Leverage inflates notional without adding equity, while stop placement sets risk, so the two can diverge sharply: a leveraged position with a tight stop can risk fewer dollars than an unleveraged one with a wide stop, gaps and slippage aside. ### Should position size be based on equity or a fixed dollar amount? They behave differently rather than one being correct. Percent-of-equity compounds: dollar risk rises after gains and contracts in drawdowns, so each loss in a streak removes a slightly smaller amount. Fixed-dollar keeps every trade identical, which is simpler to audit and common under evaluation rules, but a shrinking account then risks a growing share of itself. Decide which behavior the plan actually wants. ### How do I convert a risk budget into a position size? Divide the budget by the loss per unit at the stop: size equals risk dollars divided by stop distance times per-point value. A $200 budget with a stop 40 ticks away on a $5-per-tick contract allows one contract; tighten the stop to 20 ticks and the same budget allows two. The formula is trivial; the discipline is refusing trades where the honest stop makes even the minimum size exceed the budget. ### What is an R-multiple? The trade's outcome expressed in units of its initial risk: a trade risking $100 that makes $250 is +2.5R, one that loses its stop is -1R. Sizing from a consistent base is what makes the arithmetic meaningful, since every trade then starts from the same denominator. Journals kept in R separate strategy quality from sizing luck, which dollar journals conflate. ### Do leverage caps make percent-risk rules unnecessary? No, they bound different failure modes. A leverage cap limits exposure, protecting against gaps, margin calls and correlation shocks that ignore stops entirely; a percent-risk rule limits the planned loss when the stop fires. A position can satisfy either while violating the other, which is why written plans state both and size to whichever binds first on the trade in question. ### How does a sizing base handle averaging down? By forcing the honesty upfront: if the plan permits adds against the position, the base must budget the total risk of the completed position, not each add in isolation. [Averaging down](https://www.luxalgo.com/library/concept/averaging-down/) that improvises grows both notional and risk with every add, which is how small planned losses become account events. A stated base converts the practice from hope into arithmetic, or exposes that it never had any. ## Implementations in the Library - Sizing Bases (LuxAlgo): https://www.luxalgo.com/library/indicator/sizing-bases/ ## Related concepts - Fixed Fractional: https://www.luxalgo.com/library/concept/fixed-fractional/ - Fixed Ratio: https://www.luxalgo.com/library/concept/fixed-ratio/ - Volatility-targeted Sizing: https://www.luxalgo.com/library/concept/volatility-targeted-sizing/ - 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/ --- Source: https://www.luxalgo.com/library/concept/sizing-bases/ (LuxAlgo Library, the encyclopedia of trading & technical analysis). Free to use with attribution: https://www.luxalgo.com/library/license/