Position Sizing and Portfolio Risk
Go beyond the 1% rule: volatility-based sizing, correlation, expectancy and the risk of ruin.
Lesson 1: Expectancy
Expectancy is the average result per trade in R (multiples of risk): (win rate × average win) − (loss rate × average loss). A 40% win rate with 2.5R winners and 1R losers gives 0.4 × 2.5 − 0.6 × 1 = +0.4R per trade. Without positive expectancy, no sizing method helps.
Lesson 2: Volatility-adjusted sizing
Set stops as a multiple of ATR and size so that each trade risks the same dollar amount. That way a volatile market doesn't quietly carry more risk than a quiet one.
Lesson 3: Correlation
Long EUR/USD, long GBP/USD and short USD/CHF are largely the same bet against the dollar. Treat correlated positions as one when you add up open risk.
Lesson 4: Risk of ruin
Even a profitable system has losing streaks. The more you risk per trade, the higher the chance a normal streak causes a drawdown you can't recover from. That's why prop firm traders with a 5% daily loss limit rarely risk more than 0.5–1% per trade.
Keep going
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