Position Sizing

Position sizing decides how much exposure a trade receives. One common method is fixed-fractional stop risk: choose the fraction of current equity intended to be lost at the stop, then solve for quantity:

quantity = (equity × risk %) / |entry price − stop price|

With $10,000 of equity, 1% planned risk, an entry at $64,000, and a stop at $62,720, the price distance is $1,280. The quantity is ($10,000 × 0.01) / $1,280 ≈ 0.0781 BTC, about $5,000 notional. For a derivative, the calculation also needs its contract multiplier and quote convention.

CME's lesson on proper position size likewise works from the stop location and the account amount at risk. The chosen percentage remains a personal strategy input, not a universal safe level.

How stop-based sizing differs from fixed quantity

A fixed quantity produces different planned losses when stop distances differ. Fixed-fractional sizing normalizes that planned loss and automatically changes size as equity changes. Ten consecutive losses of exactly 1% compound to about a 9.56% decline, because each later percentage is taken from a smaller account.

A common misconception is that “1% risk” caps the realized loss at 1%. It caps only the modelled loss at the stop price. Gaps, slippage, fees, liquidation, and orders that do not fill can increase it. The SEC's stop-order bulletin explains that a stop price is a trigger and can differ from execution price.

On AlphaProve

AlphaProve supports risk_per_trade, percent_equity, fixed_notional, fixed_contracts, leverage_notional, and leverage_risk. A signal's risk_pct can override stop-based sizing for that entry. The public risk-management reference defines the modes and fallbacks. Nine stop-loss methods backtested also demonstrates a subtle consequence: when quantity is derived from stop distance, changing the stop changes both the exit and the position size.