Fixed fractional sizing and the 1% rule

Module 1 established that size decides survival. This module turns that into a procedure you can run before every trade in under a minute.

Fixed fractional: risk a percentage, not a number

Fixed fractional sizing means: on every trade, the most you can lose if your stop is hit is a fixed percentage of your current account.

dollars at risk = account balance × risk percentage

Two words in the definition carry all the weight. "Current" means you recompute from today's balance, so risk shrinks automatically in a drawdown and grows automatically as the account grows. "If your stop is hit" means the number is a planned loss, not the size of the position. A $100 risk might be a $2,500 stock position or a $17,000 forex position; the next lesson shows how.

Why a percentage beats a fixed dollar amount

Compare risking a fixed 1% with risking a fixed $100 on a $10,000 account through 20 straight losses.

At 1% the difference is small: −18.2% versus −20%. Now do the same comparison at 5%.

Fixed fractional sizing can never mathematically reach zero, because each loss is a fraction of what remains. Fixed dollar sizing reaches zero on a schedule. In practice minimum lot sizes eventually stop you from shrinking further, but by then you have had a very long warning.

Key idea: Risk a percentage of the current balance. It throttles you automatically in a drawdown, which is exactly when you are least able to throttle yourself.

Why 1%?

The 1% rule is not sacred; it is a sensible default that falls out of the streak math in Module 1.

• Expected longest losing streak over a career: 10 to 15 trades.
• Fifteen straight losses at 1%: 0.99^15 = 86.0%, a 14% drawdown. Needs a 16.3% gain to recover. Painful, recoverable, and well below the bend in the recovery curve.
• Fifteen straight losses at 2%: 0.98^15 = 73.9%, a 26% drawdown. Needs 35% to recover. Now you are at the bend.
• Fifteen straight losses at 3%: 0.97^15 = 63.3%, a 37% drawdown. Needs 58% to recover. Most people quit here.

So 1% keeps a normal bad streak in the "annoying" zone, 2% puts it at the edge of "dangerous", and 3% or more assumes streaks will not happen to you.

For your first few hundred trades, 0.5% is better than 1%. You do not have an edge yet, you are paying for sample size, and 0.5% makes the tuition cheap. Fifteen losses at 0.5% is a 7.2% drawdown.

What counts as "the account"

Use the money actually in the trading account, not your net worth and not the number the broker calls "buying power". If you have $10,000 cash and 4:1 margin, your account is $10,000. Buying power tells you how large a position you are permitted to hold; it says nothing about how much you can afford to lose.

For a prop-firm evaluation, "the account" for sizing purposes is not the nominal $100,000; it is the drawdown you are allowed before failing. Module 5 covers this in detail.

The one-minute procedure

1. Look up today's balance. Say $7,400.
2. Multiply by your risk percentage. At 1%: $74.
3. That $74 is the most the trade may lose if the stop is hit. Everything else (shares, contracts, lots) is derived from it in the next lesson.

Try it: Write down your current balance and compute 0.5%, 1% and 2% of it. Then look at your last five trades and write down how much each one would have lost at the stop. If those numbers are above your 2% figure, you have been trading a different, much riskier plan than you thought.

Recap

• Fixed fractional sizing: dollars at risk = current balance × risk %.
• A percentage shrinks risk automatically in drawdowns and can never reach zero; a fixed dollar amount can.
• 1% survives a 15-loss streak with a 14% drawdown; 3% turns the same streak into a 37% drawdown.
• Beginners should start at 0.5% because they are buying sample size, not returns.
• "The account" is cash in the trading account (or allowed drawdown for prop), never buying power.