Fixed Lots Versus Fixed Percentage Over Ten Losing Trades

[Fairman]

Fixed Lots Versus Fixed Percentage Over Ten Losing Trades

Scenario: two traders start with 10,000 dollars and lose ten trades in a row. Trader A trades a fixed 0.40 lots with a 25-pip stop, so each loss is 100 dollars. Trader B risks 1 percent of current equity per trade.

Work it out for Trader A. Each loss is 100 dollars flat. After ten losses, the account is at 9,000, a 10 percent drawdown.

Trader B loses 1 percent of the current balance each time. After ten losses, the account is 10,000 times 0.99 to the tenth power, which is about 9,044, a 9.56 percent drawdown.

The difference looks small. Extend the streak to thirty losses, which is rare but possible with a bad strategy or a bad market. Trader A loses 3,000 dollars, ending at 7,000, a 30 percent drawdown. Trader B ends at 10,000 times 0.99 to the thirtieth power, about 7,397, a 26 percent drawdown.

The percentage method always leaves something. Fixed lots could in theory go to zero. And with fixed lots, risk as a share of the account grows as equity falls: at 7,000, a 100-dollar loss is 1.43 percent.

On the winning side, fixed lots do not compound, while the percentage method grows size with the account.

Takeaway: percentage sizing protects the downside and compounds the upside.

Practical step: simulate twenty trades on a spreadsheet using both methods with the same win-loss sequence.