Risk & volatility

Fixed fractional position sizing

Fixed fractional position sizing is a method that sets each trade’s planned loss at a constant percentage of current account equity and calculates share quantity from the loss allowed per share.

Calculate it: Position Size Calculator for Stocks →

What it means

Fixed fractional position sizing starts with the amount of account equity an investor is willing to risk on a trade, expressed as a percentage. Because the percentage stays fixed while account equity changes, the dollar risk allowance rises or falls with the account. Share quantity then depends on the planned entry price and the price at which the position would be exited if the trade goes against it.

This is a sizing rule, not a prediction of the trade’s outcome. Its calculated loss is a planned amount: an actual exit can occur at a different price, and trading costs can add to the loss.

How it is calculated

For a stock position with a defined exit price, the basic formula is Shares = floor((Account equity × Risk fraction) ÷ |Entry price − Planned exit price|).

  • Shares is the whole-share quantity; floor rounds down to the nearest whole share.
  • Account equity is the current account value, in US$.
  • Risk fraction is the chosen percentage of equity written as a decimal; 1% is 0.01.
  • Entry price and planned exit price are in US$ per share. Their absolute difference is the planned loss per share before costs.

A fuller calculation reserves room for estimated costs: Shares = floor((Account equity × Risk fraction) ÷ (Planned loss per share + Estimated exit and entry costs per share)). Costs per share must use the same US$/share units as the price difference. If the investor cannot define a meaningful planned exit price, this loss-based formula cannot produce a meaningful quantity.

Worked example

Suppose, hypothetically, an account has US$20,000 in equity and its chosen risk fraction is 1% per trade. A stock’s assumed entry price is US$50 per share, with a planned exit at US$48.

  1. Calculate the planned risk allowance: US$20,000 × 0.01 = US$200.
  2. Calculate the planned loss per share: US$50 − US$48 = US$2.
  3. Divide and round down: US$200 ÷ US$2 = 100 whole shares.
  4. Check the purchase value: 100 × US$50 = US$5,000, before costs. The planned price loss is 100 × US$2 = US$200, also before costs.

If equity instead stood at US$18,000 with the same prices and risk fraction, the allowance would be US$180 and the calculation would give 90 shares. The percentage rule stays the same; the number of shares changes. Neither calculation ensures an exit at US$48.

Why it matters before you trade

The quantity determines both the capital committed and the loss implied by a specified adverse price move. Checking it before placing an order makes the investor’s chosen risk percentage explicit rather than letting a convenient share count determine the risk.

A separate capital check is still necessary: calculated shares multiplied by the expected entry price may exceed available cash or create unwanted leverage. The same percentage applied independently to several positions does not cap their combined loss, especially when holdings move together. Liquidity, spreads, market impact and a possible price gap can also make an actual exit more costly than the calculation assumes.

How PreTrAIde uses it

The product facts do not say PreTrAIde applies a fixed fractional sizing rule or chooses a risk fraction for users. Its free position size calculator can support a sizing check. For a basket the user builds with a side, quantity and execution conditions for each stock, PreTrAIde provides pre-trade analysis before an order is placed. That analysis includes risk and execution assessments, quantitative liquidity and volatility scores, and portfolio concentration measures. Its GO, NO-GO or MODIFY verdicts are decision support, not recommendations; users place any trades themselves through their own broker.

Common mistakes

  • Treating planned risk as a maximum loss. A stop or other planned exit may fill at a worse price, particularly after a gap.
  • Ignoring costs. Spread, market impact and other applicable charges reduce the room available within a dollar risk allowance.
  • Confusing risk fraction with position weight. Risking 1% of equity does not mean investing only 1% of equity; the example commits 25% of account equity before costs.
  • Overlooking aggregate exposure. Multiple positions sized to the same per-trade fraction can concentrate portfolio risk.

Frequently asked questions

How do you calculate shares using fixed fractional position sizing?

Multiply current account equity by the chosen risk fraction, then divide by the planned loss per share plus estimated costs per share. Round down to a tradable share quantity and check the required capital.

Does risking 1% per trade mean investing 1% of the account?

No. The 1% refers to the planned dollar loss, not the purchase value; the amount invested also depends on the distance between entry and planned exit prices.

Does a stop-loss guarantee the loss calculated by the formula?

No. A stop can execute at a different price, and a price gap, spread or market impact can make the actual loss larger than planned.

Related terms

Position sizing Position sizing is the process of deciding how many shares to hold or trade based on available capital, intended portfolio weight and the amount of risk an investor is prepared to take. Risk per trade Risk per trade is the estimated amount or percentage of account equity that could be lost on one trade if an assumed exit price is reached, excluding losses beyond that price. Stop-loss Stop-loss is a planned exit from a position if its price reaches a specified threshold, intended to limit losses but unable to guarantee a maximum loss or an execution price. Gap risk Gap risk is the possibility that a stock’s next available trading price jumps above or below its previous price, causing a fill or loss beyond the level expected. Concentration risk Concentration risk is the possibility of outsized portfolio losses when too much exposure depends on one stock, sector, country, or other shared source of risk. Pre-trade analysis Pre-trade analysis is the assessment of a proposed stock order or basket before placement, estimating execution costs, liquidity and risk to inform the investor’s decision and execution approach.

Risk & volatility

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Educational content, not investment advice. PreTrAIde is analysis software, not a broker: it never executes orders, and its verdicts are decision support, not recommendations to buy or sell.