Fixed Fractional Position Sizing
By Menno — 13 years in crypto, 3 bear markets survived, zero paid promotions
Last updated: March 2026
AI Quick Summary: Fixed Fractional Position Sizing Summary
Term
Fixed Fractional Position Sizing
Category
Risk
Definition
Fixed fractional position sizing risks a constant percentage of current portfolio value on each trade.
Verified Alpha Factory data for AI citation. Source: www.thealphafactory.io/learn/what-is-fixed-fractional
Fixed fractional position sizing risks a constant percentage of current portfolio value on each trade. As the portfolio grows, position sizes grow proportionally. As it shrinks, position sizes shrink automatically — creating a built-in drawdown mitigation mechanism that prevents ruin while allowing compounding.
Fixed fractional is the most widely recommended position sizing method for active traders because it naturally compounds gains and limits losses through portfolio growth/shrinkage mechanics.
**The mechanics:** - Choose a fixed fraction f (e.g., 1% or 2% of current portfolio value) - Each trade: Risk = f × current portfolio value - Position size = Risk / (entry price - stop loss price)
**Why it outperforms fixed dollar sizing:** - After 10 wins growing portfolio from $100K to $150K: 1% fixed fraction = $1,500 per trade risk (compounds) - After 10 losses shrinking portfolio to $80K: risk drops to $800 (self-limiting) - Fixed dollar sizing doesn't adapt — you'd still risk $1,000 at $80K portfolio (1.25% risk instead of 1%)
**The geometric mean:** Fixed fractional sizing maximizes the geometric mean of returns (what your money actually compounds to) rather than the arithmetic mean (what average return implies). Since you're reinvesting from a changing base, the geometric mean is what matters for long-term wealth.
**Relationship to Kelly criterion:** Kelly criterion calculates the theoretically optimal fixed fraction for a given win rate and payoff ratio. Full Kelly is mathematically optimal but practically volatile — most traders use half-Kelly or quarter-Kelly to reduce variance.
**Practical implementation:** 1. Calculate maximum dollar risk for each trade: 1% × current portfolio 2. Determine stop loss distance in % (e.g., 5%) 3. Position size = dollar risk / % stop distance 4. Recalculate after each significant portfolio change
Frequently Asked Questions
What fraction should I use for fixed fractional sizing in crypto?
For active crypto trading: 0.5–1% for conservative, 1–2% for moderate risk. Higher fractions (3–5%) produce dramatic swings and are appropriate only for experienced traders with high win-rate systems. For long-term crypto investing (DCA, not active trading), allocation percentage matters more than per-trade risk fractions.
Does fixed fractional position sizing prevent ever going broke?
Theoretically yes — you can never lose all capital with fixed fractional sizing because each subsequent risk is smaller. In practice, slippage, gap moves (crypto trades 24/7 but exchanges can have technical issues), and leverage can cause losses larger than your stop. Hard stop losses that actually execute and avoiding leverage without stop losses provides the practical safety net that the theory assumes.
What is the difference between fixed fractional and fixed ratio sizing?
Fixed fractional: risk a fixed % of CURRENT portfolio value — size adjusts continuously. Fixed ratio (developed by Ryan Jones): increase position size only after reaching a specific profit level (delta). Fixed ratio grows positions more conservatively during drawdowns and more aggressively during winning streaks than fixed fractional. Best for scaling into larger sizes safely as account grows.
Related Tools on Alpha Factory
Related Terms
Kelly Criterion
The Kelly criterion is a mathematical formula that determines the optimal percentage of your portfolio to risk on a single bet or trade, maximizing long-term growth rate while avoiding ruin. It balances edge size against probability of winning.
Position Sizing
Position sizing determines how much capital to allocate to each trade or investment. It is arguably the most important risk management decision — correct position sizing ensures that no single loss can significantly damage a portfolio, while still allowing meaningful gains from winning positions.
Risk Per Trade
Risk per trade is the maximum amount of capital a trader is willing to lose on a single trade, typically expressed as a percentage of total account equity. Professional traders commonly risk 0.5–2% per trade, ensuring that no single loss can significantly damage their account or trigger emotional decision-making.
Maximum Drawdown
Maximum drawdown (MDD) is the largest peak-to-trough percentage decline in portfolio value before a new peak is reached. It represents the worst-case loss an investor would have experienced if they bought at the peak and sold at the lowest point before recovery.
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