Position sizing and drawdown
Every trading style in this guide rests on the same arithmetic: how much you risk per trade and how much of your capital a bad run can erase.
Fixed-fraction risk
quantity = (capital x risk fraction) / (entry - stop)Keeping the fraction fixed (say 1%) means each loss shrinks as the account shrinks, and each win grows as the account grows.
Why drawdowns hurt more than they look
| Loss from peak | Gain needed to recover |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 50% | 100% |
Recovery needed = 1 / (1 - loss) - 1. That is why a plan should limit drawdown first and chase returns second.
Losing streaks are normal
With a 50% win rate, a streak of 7 consecutive losses has a probability of around 0.8% in any one sequence, yet over hundreds of trades streaks like this occur. At 1% risk per trade a 7-loss streak costs about 6.8% of the account. At 5% risk per trade it costs about 30%. Choose a size that lets you survive the streak you will eventually meet.
Expectancy
expectancy per trade = (win rate x average win) - (loss rate x average loss)Compute it after costs, on at least a few dozen trades, and compare it to the variation of results. A positive expectancy over a small sample can be luck.
Set rules, in writing
- Risk per trade (for example 0.5% to 1%).
- Maximum open risk across all trades (for example 3% to 5%).
- Daily loss limit and weekly loss limit.
- Drawdown triggers: reduce size at -10%, pause and review at -15%, stop at -20% (use levels that fit your own plan).
Do not size up after wins by feeling
Raising size because you feel lucky is the same error as raising size to win back a loss. Let the fixed fraction do the work.