Entry signals get the attention. Position size decides whether an account survives long enough for a strategy to matter.
Fixed-fractional sizing
The most common method risks a fixed fraction of the account on each trade. You choose the fraction, find the distance from entry to stop, and calculate the size at which hitting the stop loses that fraction. As the account grows or shrinks, the amount at risk changes with it.
Why small fractions
Losing streaks are a normal property of every strategy, including good ones. The smaller the fraction risked per trade, the longer the streak an account can absorb, and the smaller the gain needed to recover afterwards. Recovery is not symmetrical: a larger loss requires a disproportionately larger gain to get back to where you started.
What sizing cannot do
A stop-loss is an instruction, not a guarantee. In a gap or a fast market, the fill can be worse than the stop price and the loss larger than planned. Correlated positions also add up: three trades that all depend on the US dollar are closer to one large trade than three small ones.
Beyond the single trade
- A daily loss limit stops a bad day becoming a bad month.
- An exposure cap limits total risk across open positions.
- A drawdown threshold prompts a pause and a review.
Automation helps here because software applies these limits without negotiation.