Source-aware field guide · 20 answers
Position Sizing and Performance Metrics
Worked definitions for sizing methods and performance statistics, with the assumptions needed to reproduce each number.
Published · reviewed for scope, source visibility and answer ownership
How to use this guide
Worked definitions for sizing methods and performance statistics, with the assumptions needed to reproduce each number. The guide is written for traders, strategy researchers, risk analysts and reporting teams. The collection explains calculations and review artifacts rather than recommending a size, target return or risk tolerance.
Use every answer to resolve one operational question: Which formula, data series and constraint produced the size or statistic, and does it answer the intended risk question? Estimates based on historical returns depend on sample, frequency, costs and distribution assumptions. They are not forecasts.
The supporting set is CFTC — Eight things to know before trading forex; NFA — Security futures risk disclosure; Investor.gov — Assessing your risk tolerance. These links provide standards, regulator material or official product documentation for the subject; they do not imply endorsement, worldwide applicability or a verified feature in a particular deployment. Check the current source, contract, configuration and qualified local advice before a production, trading or compliance decision.
What Is Fixed-Fractional Position Sizing?
Fixed-fractional sizing risks a chosen fraction of a changing capital base on each position using a defined loss distance and contract value.
- Use it to
- Calculate size from current eligible equity, planned loss distance, currency conversion and lot increment.
- Check the boundary
- Gaps and rounding can make realized loss exceed the intended fraction.
What Is Fixed-Lot Position Sizing?
Fixed-lot sizing uses the same quantity or contract count across trades unless an explicit rule changes it.
- Use it to
- Test how constant quantity changes monetary risk across prices, volatility and instruments.
- Check the boundary
- Equal lots do not mean equal notional exposure or equal loss potential.
What Is Volatility-Adjusted Position Sizing?
Volatility-adjusted sizing reduces or increases quantity according to a declared movement measure so estimated price risk is more comparable across trades.
- Use it to
- Define the volatility estimator, horizon, target, cap and rebalance frequency.
- Check the boundary
- Volatility can jump faster than the sizing input updates.
How Does ATR Position Sizing Work?
ATR position sizing converts an Average True Range value and multiplier into a price-risk distance, then sizes quantity against a monetary risk budget.
- Use it to
- Align ATR timeframe, period, multiplier, contract value, conversion and rounding.
- Check the boundary
- ATR describes historical movement and does not cap gap or execution loss.
What Is the Kelly Criterion?
The Kelly criterion derives a growth-optimal stake under a specified probability and payoff model, assuming repeated opportunities and reliable inputs.
- Use it to
- Show the estimated edge, payoff distribution, constraints and sensitivity before considering a fraction.
- Check the boundary
- Input error and changing returns can make full-Kelly exposure dangerously unstable.
What Is Half Kelly?
Half Kelly uses one half of the stake produced by a stated Kelly calculation to reduce modeled volatility and sensitivity while retaining the same assumptions.
- Use it to
- Compare drawdown and growth distributions under input uncertainty rather than quoting the fraction alone.
- Check the boundary
- Halving an unreliable estimate does not make the underlying edge real.
What Is Equal Risk Contribution?
Equal risk contribution allocates a portfolio so components contribute similarly to a modeled total risk measure under a covariance and constraint set.
- Use it to
- Record assets, return frequency, covariance estimator, bounds and rebalancing.
- Check the boundary
- Estimated correlations can change and numerical contributions depend on the chosen model.
What Is Value at Risk?
Value at Risk estimates a loss threshold for a stated confidence level and horizon under a specified historical, parametric or simulation method.
- Use it to
- Name the method, confidence, horizon, data window and treatment of positions and costs.
- Check the boundary
- VaR does not state the size of losses beyond the threshold and can miss regime shifts.
What Is Expected Shortfall?
Expected shortfall estimates the average modeled loss in outcomes beyond a selected quantile under a declared distribution or historical method.
- Use it to
- Calculate it beside VaR with the same horizon, data and valuation assumptions.
- Check the boundary
- Tail estimates are unstable with small samples and remain model-dependent.
What Is Beta-Adjusted Exposure?
Beta-adjusted exposure weights positions by estimated sensitivity to a chosen benchmark so directional market exposure can be compared on one basis.
- Use it to
- State the benchmark, return interval, estimation window and currency.
- Check the boundary
- Beta is historical, may be nonlinear and does not capture every factor or tail risk.
How Does Currency Conversion Affect Position Size?
Currency conversion translates the intended loss, contract value or profit from an instrument currency into the account's reporting currency using a defined rate and side.
- Use it to
- Record conversion pairs, timestamps, bid or ask convention and rounding.
- Check the boundary
- Using an inverted or stale rate can materially distort size and reported risk.
What Is Profit Factor?
Profit factor divides gross profits by the absolute value of gross losses for a declared set of net trade outcomes.
- Use it to
- Define trade grouping, costs, sample period and treatment when no losses occur.
- Check the boundary
- One large winner can dominate the ratio and a small sample can look exceptional.
What Is Win Rate?
Win rate is the share of counted observations with a positive outcome under a declared definition of a trade and break-even result.
- Use it to
- Use net outcomes, consistent trade grouping and a confidence interval.
- Check the boundary
- Win rate says nothing about the magnitude of wins and losses by itself.
What Is Average Win vs Average Loss?
Average win and average loss summarize the mean positive and negative net outcome among counted trades, using the same unit and grouping.
- Use it to
- Report distributions, sample counts, outliers and costs alongside both averages.
- Check the boundary
- Means can hide skew, changing size and a few extreme results.
What Is Break-Even Win Rate?
Break-even win rate is the success proportion required for zero expected outcome given a stated average win, average loss and cost model.
- Use it to
- Derive it from consistent net payoffs and test sensitivity to slippage and fees.
- Check the boundary
- Changing payoff size or exit behavior makes a fixed break-even rate obsolete.
What Is Geometric Return?
Geometric return compounds period returns to describe the constant per-period rate that would connect starting and ending value over the sample.
- Use it to
- Use time-ordered returns with a clear treatment of cash flows and periods.
- Check the boundary
- An arithmetic average can overstate compound growth when returns are volatile.
How Does Compounding Work in Trading?
Compounding occurs when gains or losses change the capital base used for later position size or return, producing multiplicative rather than additive growth.
- Use it to
- Model the actual sizing rule, withdrawals, deposits, fees and sequence.
- Check the boundary
- Reordering identical returns can change drawdown even when the final product is the same.
What Is Recovery Factor?
Recovery factor commonly compares net profit with maximum drawdown under a declared equity series and formula.
- Use it to
- State whether drawdown is absolute or percentage, the period and cash-flow treatment.
- Check the boundary
- Multiple incompatible formulas use the same name, so the equation must accompany the number.
What Is the Sharpe Ratio?
The Sharpe ratio divides average excess return by return volatility after aligning the return interval and risk-free rate, often with an annualization convention.
- Use it to
- Publish the frequency, benchmark rate, sample, annualization and cost treatment.
- Check the boundary
- The ratio assumes volatility is an adequate risk proxy and can be distorted by non-normal returns.
What Is the Sortino Ratio?
The Sortino ratio divides a chosen excess or target return by a downside-deviation measure defined relative to a minimum acceptable return.
- Use it to
- State the target, downside formula, frequency, sample and annualization.
- Check the boundary
- Different downside definitions can produce incomparable ratios.
Primary and official references
These sources establish definitions, standards or official product behavior used across this guide. Follow the exact source and check its current version before a live implementation.