Worked example meaning: what “fixed percentage risk” is
Fixed Percentage Risk is a position-sizing rule where you set a constant fraction of your account equity to be the maximum loss you plan to tolerate for a given trade idea. The core mechanics are simple: you choose a risk percent, compute the risk amount in account currency, then determine the position size that would make the loss equal (or close) to that risk amount if a predefined price move happens.
In this article, “planned maximum loss” means a modelled outcome under assumptions. Real results vary with market movement and trading costs.
Mechanism: inputs and the calculation flow
A worked example needs inputs. A typical set of assumptions is:
- Account equity (E): the account value used for the percentage.
- Risk percent (p): the fraction of equity you intend to risk (for example, 1%).
- Risk amount (R):
R = E × p. - Reference stop distance: the price move between your entry reference and your stop level (call it D in price units).
- Instrument conversion: how the price move translates into profit/loss per unit size (depends on the instrument contract specification and the quote).
A key distinction: mechanics are stable (the arithmetic). Market/provider conditions are variable (execution, spreads, and whether the stop behaves like the model).
Evidence or example: one fully numeric worked scenario
Below is a numerical worked example. It is intentionally hypothetical and uses simplified assumptions so the steps can be independently verified.
Assumptions
- Account equity: E = 10,000 (in account currency).
- Fixed risk percent: p = 1%.
- Therefore risk amount: R = 10,000 × 0.01 = 100.
- Suppose an instrument is quoted such that a 1.0 price move corresponds to 10 profit/loss units per 1 position unit.
- You plan an exit model where the stop distance is D = 2.5 price units from the entry reference.
These assumptions are about the example setup, not about any real-time price.
Step-by-step
- Compute risk amount:
R = 100. - Compute loss per 1 position unit from the stop model:
- If 1 position unit loses
10 × (price move), then forD = 2.5: - Loss per 1 unit =
10 × 2.5 = 25.
- If 1 position unit loses
- Compute position size (units) so the loss matches the risk amount:
Units = R / 25 = 100 / 25 = 4.
Result under the model
- With the stated conversion and stop distance, a 2.5 price-unit adverse move would produce a modeled loss near 100, matching the fixed 1% risk rule.
Limitations and risks: what can break the “fixed percentage” outcome
Even if the arithmetic is correct, several failure modes can change realized risk:
- Execution and slippage: If the fill happens worse than the assumed entry/stop relationship, the loss can exceed the model.
- Spreads and costs: Many costs are not included in the simplified stop-distance calculation, so the realized loss can be higher.
- Gap or fast moves: In thin liquidity or sudden moves, the price can jump past the stop level, causing losses to exceed what the “distance” model implies.
- Equity changes before closure: Because the method uses equity at the time you size the position, later equity changes can make the risk fraction different than intended.
- Conversion assumptions: The example used a fixed “profit/loss per price move per unit” mapping. In practice, this mapping depends on the instrument specification and quote currency.
Verification and next question you can ask
You can independently verify the example by recalculating three items from the stated assumptions:
- Compute
R = E × p. - Compute loss per unit from the stop distance:
LossPerUnit = (conversion per price) × D. - Compute units:
Units = R / LossPerUnit.
A useful next question is: Which inputs you use for D and the conversion mapping are actually consistent with your execution environment? If those inputs differ from reality (for example, you ignore costs or slippage), the fixed percentage rule may not hold.
For deeper coverage, you can also compare this arithmetic approach to other position sizing methods and check which assumptions they require.