When deciding how much to risk on each trade, fixed ratio and fixed fractional sizing are two popular methods. Here’s a quick breakdown:
- Fixed Fractional Sizing: Risk a fixed percentage of your account equity for every trade. For example, if you risk 2% on a S$50,000 account, you’d risk S$1,000 per trade. As your account grows or shrinks, your risk adjusts proportionally. It’s simple and helps protect capital during losing streaks.
- Fixed Ratio Sizing: Increase your position size only after hitting specific profit milestones (e.g., every S$5,000 earned). This method rewards winning streaks but doesn’t reduce position size as quickly during losses, making it more aggressive.
Key Differences: Fixed fractional sizing adjusts dynamically with your account balance, offering steady risk management. Fixed ratio sizing grows positions in steps, focusing on profit milestones and compounding gains more aggressively.
Which to Choose?
- Use fixed fractional sizing if you prefer steady growth and capital protection – ideal for beginners or smaller accounts.
- Opt for fixed ratio sizing if you’re experienced, have a higher risk tolerance, and aim for faster account growth.
Quick Comparison:
| Feature | Fixed Fractional Sizing | Fixed Ratio Sizing |
|---|---|---|
| Risk Basis | Percentage of account equity | Profit milestones |
| Adjustment | Continuous, with every trade | Stepwise, after profits |
| Drawdown Handling | Reduces risk automatically | Slower to reduce positions |
| Complexity | Easy to calculate | Requires profit tracking |
Choose the approach that aligns with your trading style, risk tolerance, and goals.
Fixed Ratio Position Sizing Explained
How Fixed Ratio Sizing Works
Fixed ratio position sizing takes a different approach compared to percentage-based methods. Instead of risking a set percentage of your account, this strategy increases your position size based on the profits you’ve accumulated.
Here’s how it works: you start with a base position. For every S$5,000 increase in profit (this is called your delta), you add another unit to your position. If your delta is smaller, your position size will grow faster and more aggressively. On the other hand, a larger delta slows things down, offering a more measured pace of growth. Traders with larger accounts, say S$100,000 or more, often choose a higher delta to avoid scaling up too quickly.
Unlike fixed fractional sizing – which adjusts risk dynamically based on changes in account balance – fixed ratio sizing rewards consecutive wins more aggressively early on. This creates a compounding effect, amplifying gains during profitable periods while keeping overall growth in check.
Fixed Ratio Sizing Features
This method has some unique characteristics. One of its strengths is how it balances position growth with risk as your account grows, maintaining a steady risk-to-aggressiveness ratio over time.
A standout feature is its performance-based adjustment. Position sizes increase during winning streaks, allowing you to capitalise on momentum, and decrease during losing streaks to limit losses. This self-regulating mechanism is tied directly to trading performance rather than just account size, acting as an effective risk management tool.
That said, fixed ratio sizing is more complex than other methods. It involves tracking two parameters: your base position and your delta, compared to the single risk percentage used in fixed fractional sizing. This means you’ll need to monitor profits closely and adjust positions accordingly, which adds a layer of complexity. Additionally, position sizes don’t reduce as quickly during drawdowns, so it’s crucial to have strong risk management practices and sufficient capital to withstand losses.
When to Use Fixed Ratio Sizing
This approach works best when its features align with your trading style and risk appetite. It’s particularly useful for traders who use systematic strategies, as backtesting can help pinpoint the ideal delta value for their needs.
Fixed ratio sizing is a good fit if you want to take advantage of winning streaks while keeping position size growth under control as your account grows. It’s especially suited to traders who prefer a more aggressive approach to compounding but still want to manage risk through careful adjustments. However, this method is better suited for experienced traders who can handle its complexity and the risks involved.
For those looking to deepen their understanding of systematic trading and advanced risk management, the resources at Collin Seow Trading Academy can be a helpful guide.
If you’re new to systematic trading or find the idea of tracking profits and adjusting positions overwhelming, this method might not be the best starting point. Up next, we’ll dive into fixed fractional sizing to explore another option for position sizing.
Fixed Fractional Position Sizing Explained
How Fixed Fractional Sizing Works
Fixed fractional position sizing involves risking a set percentage of your account’s equity on every trade. This approach adjusts your position size automatically as your account balance changes – growing during profitable periods and shrinking during losses. The goal is to maintain a consistent level of risk relative to your account size.
Here’s an example: Let’s say you have an account balance of S$100,000 and decide to risk 2% per trade. That means you’re risking S$2,000. If your account grows to S$150,000, your risk increases to S$3,000. Conversely, if it drops to S$80,000, your risk reduces to S$1,600.
The formula for calculating position size is straightforward:
Position Size = (Account Equity × Risk Percentage) ÷ (Entry Price – Stop Loss Price).
For instance, with a S$100,000 account risking 1% (S$1,000), an entry price of S$50, and a stop loss at S$48, your position size would be:
S$1,000 ÷ (S$50 – S$48) = 500 shares.
What sets fixed fractional sizing apart is its dynamic nature. Unlike fixed dollar risk, which remains unchanged, this method lets you take larger positions when you’re performing well, while scaling back during tough times. This balance between opportunity and protection is a key strength of this approach.
Fixed Fractional Sizing Features
“Collin’s approach emphasises strategic position sizing, which involves determining the appropriate investment amount for each trade based on an individual’s risk tolerance and the trade’s risk-reward profile. This careful calculation helps traders manage their exposure to risk while optimising their portfolio’s growth potential.”
One of the standout benefits of fixed fractional sizing is its focus on protecting your capital. During extended drawdowns, as your account equity decreases, the method reduces your position size. This limits the potential damage to your remaining funds.
Another advantage is its scalability. Whether you’re starting with S$10,000 or managing a portfolio worth S$500,000, the percentage-based approach ensures your risk remains proportional to your capital.
The method relies on a single variable: your chosen risk percentage. This simplicity eliminates emotional decision-making, helping you stay consistent in your risk management approach.
That said, there are some drawbacks. For traders with smaller accounts, reduced position sizes can limit the potential for rapid growth. Additionally, the fixed risk percentage doesn’t account for fluctuations in market volatility, which could impact performance.
These features make fixed fractional sizing an appealing choice under specific market conditions, which we’ll explore next.
When to Use Fixed Fractional Sizing
This method is ideal for traders who value steady risk management and safeguarding their capital over chasing aggressive returns. It’s especially beneficial for beginners who need a clear, disciplined framework for position sizing.
Most traders using fixed fractional sizing risk between 2% and 10% of their account equity per trade. For conservative traders or those with lower win rates, a risk level of 2–5% is recommended to minimise losses. In Singapore, many traders start with a 1–2% risk allocation to build confidence while protecting their initial funds.
This approach is particularly effective in volatile markets, where emotional decisions can lead to oversized positions. By sticking to a percentage-based system, your position sizes adjust naturally as your account grows, allowing you to benefit from your improving skills without overextending yourself.
For traders managing SGD-denominated accounts, this method adapts seamlessly to local market conditions and stock prices. Its flexibility makes it a practical option for both domestic and international trading.
If you’re looking to refine your risk management skills, resources from Collin Seow Trading Academy can provide step-by-step guidance on applying these strategies in real-world scenarios.
Fixed Ratio vs Fixed Fractional: Direct Comparison
Comparison Table
Position sizing methods cater to different trading goals and risk preferences. Here’s a quick comparison tailored for Singapore traders:
| Feature | Fixed Fractional Sizing | Fixed Ratio Sizing |
|---|---|---|
| Risk Calculation | Fixed percentage of current equity per trade | Increases position after reaching set profit thresholds |
| Position Adjustment | Continuous, adjusts with every account value change | Stepwise, after meeting profit milestones |
| Capital Growth | Steady compounding with every trade | Compounds in defined steps |
| Drawdown Response | Reduces risk automatically by lowering position size | Holds position size until the next profit increment |
| Complexity | Easy to calculate and apply | More complex, requiring detailed profit tracking |
| SGD Account Suitability | Suitable for most local traders | Works well but needs meticulous tracking |
The main difference lies in their response to account performance. Fixed fractional sizing adjusts positions based on every account balance change, while fixed ratio sizing waits for specific profit milestones to make adjustments. The table above highlights the strengths and limitations of each method, helping you weigh your options.
Pros and Cons of Each Method
Fixed fractional sizing is straightforward and automatically scales risk with account size, offering a practical approach for traders. For example, if a Singapore trader risks 2% per trade on a S$100,000 account, they would risk S$2,000 per trade. If the account drops to S$80,000, the risk adjusts to S$1,600. However, as the account grows, larger position sizes could lead to higher exposure, especially during consecutive winning trades.
Fixed ratio sizing, on the other hand, provides a controlled growth strategy by increasing position sizes only after meeting specific profit milestones. This method rewards consistent gains and avoids overexposure after winning streaks. However, it’s more complex and requires careful tracking of milestones. It also limits rapid growth and adjusts more slowly during account downturns.
For traders in Singapore with smaller accounts, fixed fractional sizing is often the go-to choice due to its simplicity. Meanwhile, those managing larger accounts or with a higher tolerance for risk may prefer the structured, stepwise approach of fixed ratio sizing.
Impact on SGD-Denominated Accounts
In SGD-based trading environments, each method has unique implications. Fixed fractional sizing adjusts instantly to changes in your SGD account balance, making it responsive to local market conditions. For instance, when trading SGX-listed stocks or Singapore REITs, this method adapts to market volatility by recalibrating position sizes in real time.
Fixed ratio sizing, however, adjusts more gradually, which might leave traders exposed during sudden market swings. While this measured approach helps avoid overtrading after profitable streaks, it may not react quickly enough to sharp market changes in Singapore.
Both methods also require careful consideration of SGD transaction costs and local brokerage fees. Calculations should reflect net account equity after fees, and traders must account for market volatility. While currency fluctuations are less of a concern for SGD-denominated accounts focused on local assets, cross-currency trades still demand careful risk evaluation. By understanding these nuances, you can choose a position sizing strategy that aligns with your trading style and goals.
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Choosing Your Position Sizing Strategy
Factors to Consider When Choosing
When deciding between fixed ratio and fixed fractional sizing, several factors come into play, including your account size, risk tolerance, trading frequency, and financial goals. These elements determine which approach aligns best with your trading style and objectives.
For traders with smaller accounts (S$20,000 to S$50,000), fixed fractional sizing often makes more sense. This method adjusts position sizes based on account equity, helping to protect capital during market downturns. On the other hand, those managing larger accounts might lean towards fixed ratio sizing, which focuses on structured compounding to accelerate growth. If you’re a conservative trader prioritising capital preservation, fixed fractional sizing offers a safer approach by limiting risk to 1-3% per trade and automatically reducing exposure during losing streaks. However, if you’re aiming for aggressive growth, fixed ratio sizing might appeal more, as it amplifies returns during winning streaks – though it also increases exposure as profits grow.
Your trading frequency also plays a role. Active traders, who make frequent trades, often appreciate the consistency of fixed fractional sizing. Meanwhile, fixed ratio sizing can work better for those who prefer fewer, high-conviction trades. Ultimately, your financial goals steer the decision: if you’re after steady, lower-volatility returns, fixed fractional sizing is the way to go. But if rapid account growth is your goal, fixed ratio sizing may be a better fit.
Understanding these factors is just the beginning. Pairing your choice with solid risk management techniques is key to long-term success.
Learning Risk Management Skills
To master position sizing, you need a strong foundation in risk management. Knowing how different sizing methods affect your trading performance and ability to preserve capital is critical for navigating the markets effectively.
One practical way to improve is by maintaining a trading journal. This helps you track your position sizing decisions, analyse outcomes, and identify areas for improvement. Regularly reviewing your performance allows you to adapt your strategy to changing market conditions or personal goals.
Starting small – such as limiting risk to 1% per trade – is a smart way to build confidence while protecting your capital. As you gain experience and refine your skills, you can gradually adjust your risk levels to enhance performance.
Continuous learning is vital, and structured education can provide the tools you need to sharpen your approach.
Systematic Trading Education Resources
The Collin Seow Trading Academy offers in-depth courses designed to teach systematic trading strategies, with a strong focus on position sizing and risk management frameworks.
For beginners, the academy provides free resources like the Market Timing 101 E-Course, which teaches how to identify optimal buy and sell points, and the Systematic Trading Profits live webclass, which introduces a 3-Phase Growth System. For more advanced traders, The Systematic Trader v.2 dives deeper into applying systematic methodologies and practical strategies to achieve disciplined trading results.
Additionally, the academy features live webinars and video content to help traders stay updated on market trends and refine their strategies for SGD-denominated accounts. By focusing on systematic trading methodologies, the academy emphasises removing emotion from trading decisions, ensuring consistent risk management, whether you prefer fixed ratio or fixed fractional sizing.
FAQs
What is the best way to choose the delta value for fixed ratio sizing in my trading strategy?
When deciding on the right delta value for fixed ratio sizing, it’s essential to consider your trading objectives, risk appetite, and account size. The delta value plays a key role in determining how quickly your position size scales as your account grows. Striking the right balance between growth and risk management is crucial.
For those with smaller accounts, opting for a lower delta value can help keep risk levels under control. On the other hand, traders managing larger accounts might prefer a higher delta value to boost growth rates. Ultimately, your chosen delta should align seamlessly with your trading strategy and financial goals.
What should beginner traders consider when deciding between fixed ratio and fixed fractional position sizing?
When deciding between fixed ratio and fixed fractional position sizing, it’s essential to weigh factors like your risk tolerance, account size, and trading objectives. Fixed fractional sizing adjusts your position size to a set percentage of your account balance. This approach is more cautious, making it ideal for protecting your capital. On the other hand, fixed ratio sizing increases position sizes as your profits grow. While this can speed up account growth, it comes with a higher level of risk.
For those new to trading, fixed fractional sizing is often the go-to choice. It offers a steady and systematic way to manage risk. As you gain more experience and confidence, you might consider trying fixed ratio sizing to potentially boost your returns. Whichever method you choose, make sure it fits well with your overall trading plan and risk management strategy.
How do I track profits and adjust positions effectively when using fixed ratio sizing for better risk management?
To manage your profits and adjust positions effectively with fixed ratio sizing, start by keeping a close eye on your trading equity. Fixed ratio sizing allows you to increase your position size as your profits grow, but it’s crucial to do this carefully to keep risk under control. Calculate the delta – the specific profit increment that justifies increasing your position size – and make adjustments only when this threshold is reached.
Maintain thorough records of your trades, noting details like entry and exit points, profits or losses, and position sizes. These records are invaluable for evaluating your performance and making well-informed adjustments. Using trading tools or software can make this process much easier and more accurate. The key is to strike a balance between growing your account and managing risk responsibly, so you don’t end up over-leveraging.
