Insider Knowledge / risk and position sizing
What is the Best Position Sizing Strategy?
The best position sizing strategy for most traders is fixed risk: risk a set dollar amount ($200 per trade) on every trade regardless of edge strength. Other strategies like Kelly criterion exist, but they're complex. Fixed risk works, stays simple, and doesn't require advanced math.
There are three main position sizing strategies. One is best for 95% of traders. The other two are for specific situations.
Strategy 1: Fixed Risk (Most Popular)
Risk the same dollar amount on every trade.
How it works: You decide you risk $200 per trade. Every trade risks exactly $200. The position size changes based on stop distance, but the dollar risk is constant.
Example: - Trade 1: Entry $100, Stop $99, Risk = $1 per share → Buy 200 shares - Trade 2: Entry $50, Stop $49.50, Risk = $0.50 per share → Buy 400 shares
Both trades risk $200.
Pros: - Simple to calculate - Easy to stick to - Prevents emotional position sizing - Works for any account size - Doesn't require sophisticated math
Cons: - Ignores trade quality (a high-probability trade and low-probability trade risk the same) - Ignores volatility (high-volatility stock and calm stock risk the same)
Who uses fixed risk: 95% of professional traders, especially beginners. It works. It's simple. It wins.
Strategy 2: Volatility-Based Risk
Risk more when volatility is low, less when volatility is high.
How it works: You calculate ATR. When ATR is low ($0.30), you risk 2%. When ATR is high ($2), you risk 1%.
Example on same $10,000 account: - Low volatility stock (ATR $0.30): Risk 2% = $200 - High volatility stock (ATR $2): Risk 1% = $100
Why? Because high volatility means bigger swings. Bigger swings mean stops get hit more. Lower your risk when things are crazy.
Pros: - Adapts to market conditions - Protects you in volatile markets - Lets you size up in calm markets
Cons: - More complex calculation - Requires ATR knowledge - Easy to overthink
Who uses volatility-based risk: Experienced traders who want to optimize. This is step 2 after mastering fixed risk.
Strategy 3: Kelly Criterion (Advanced)
Risk a percentage based on your win rate and payoff ratio.
The Kelly formula: f* = (bp - q) / b
Where: - f* = fraction of bankroll to risk - b = payoff ratio (win size / loss size) - p = probability of winning - q = probability of losing (1 - p)
Example: You have a 60% win rate and a 3:1 payoff ratio.
f* = (3 × 0.60 - 0.40) / 3 = (1.8 - 0.4) / 3 = 1.4 / 3 = 0.47
Kelly says risk 47% of your account per trade. That's insane for trading (you'd blow up in a bad streak). Most traders use "fractional Kelly" and risk 25% of what Kelly suggests, which is 0.47 × 0.25 = 12%. Still too high for most traders.
Pros: - Mathematically optimal - Maximizes long-term growth - Adjusts to your actual edge
Cons: - Requires accurate data (win rate, payoff ratio) - Complex calculation - Risk of overfitting - Overkill for most traders
Who uses Kelly: Advanced traders with audited historical data and good software. This is not for beginners.
The verdict:
Start with fixed risk ($200 per trade, every trade). This works. You'll make money. You'll stay in the game.
Once you've been trading for 2+ years with consistent results, consider volatility-based risk. If you're a quant or data scientist, conside
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