Forex glossary
Compound Position Sizing
Fixed-fractional compound sizing adjusts the risk amount as current equity changes: it rises after gains and falls after losses. Volume also depends on assumed loss per unit and instrument constraints. Compounding does not turn a negative trading edge into a positive one.
Illustrative example
How does it work in practice?
In a hypothetical model, you allocate 1% of equity to a scenario loss of 1 USD per unit: 10,000 USD of equity gives 100 units. At 12,000 USD of equity, the same rule gives 120 units, before volume restrictions.
A case to work through
Two losses of 2%
Model: starting capital is 5,000 USD; each of two sequential closed losses is 2% of current capital.
- After the first loss, 5,000 × 0.98 = 4,900 USD remains.
- After the second, 4,900 × 0.98 = 4,802 USD remains.
What follows? Update the percentage base after each trade.
Example boundary: This omits gaps, costs and simultaneous open positions.
An updated percentage base
Text description of the diagram
- Start: 5,000 USD.
- First 2% loss: 5,000 × 0.98 = 4,900 USD.
- Second 2% loss: 4,900 × 0.98 = 4,802 USD.
A useful distinction
Compound Position Sizing / Position Sizing
Position sizing maps a budget and loss per unit to quantity; compounding updates the capital base.
Change an assumption, see the result
What changes if…?
Explore sequential fixed-percentage losses; the calculator excludes costs and losses exceeding the plan.
Model: capital × (1 − percentage/100)^loss count. Each closed loss exactly equals the specified share of current capital; no deposits, costs or gaps. A stop does not guarantee this outcome. The percentage is not a recommendation.
Check your understanding
Calculate capital after consecutive fixed-percentage losses.
Show the answer and explanation
3,920.40 USD
4,000 × 0.99 × 0.99 = 3,920.40.
From position budgets to portfolios
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Read the fuller explanation
Related terms
Sources and documentation
- CME Group: Proper Position Size
The lesson links planned position size to the risk budget, stop distance and the contract's monetary value per price increment.
Document read:
The example illustrates the mechanism. Check current account conditions and instrument specifications with the provider.