Money management: sizing after wins and losses
Risk management decides how much you risk on ONE trade (the 1% rule). Money management decides how that size changes over time, as your account grows or shrinks. Picking the right method is the difference between compounding calmly and blowing up the account in one streak.
The methods, worst to best
| Method | How it works | Verdict |
|---|---|---|
| Martingale | Double the size after each loss to "recover" all at once. | ✗ Guaranteed ruin. One streak (which always comes) wipes the account. The DNA of nearly every EA that blows up. |
| Fixed lot | Always the same size (e.g. 0.10 lots), no matter what. | 🟠 Safe but suboptimal: doesn't compound on wins and risks a growing % on losses. |
| Fixed fractional (1%) | Always risk the same % of current capital. Size rises on wins and falls on losses, automatically. | ✓ The sensible standard. Compounds in good times and protects in bad ones automatically. |
| Anti-martingale | Increase risk after a win, decrease it after a loss (within limits). | ✓ Advanced. Rides good streaks and brakes in bad ones — the opposite of martingale. |
Why fixed fractional wins
Risking a fixed percentage of current capital (not a fixed amount) has two virtues that happen by themselves: when you win, your capital grows and so does your trade size → compounding. When you lose, your capital drops and size shrinks with it → each loss is smaller in dollars, which slows the fall. It's a system that accelerates in good times and brakes in bad ones without you deciding anything in the heat of the moment. See it yourself: how risk of ruin changes with different %, and how the compound interest calculator compounds.
The deadly trap: averaging down and martingale. "It dropped, I'll buy more to lower my average price" sounds reasonable and is ruin disguised as sense: you're increasing risk exactly when the market tells you you're wrong. Martingale (doubling after a loss) is the same idea taken to the extreme: it works many times in a row —giving a false sense of a winning system— until one normal streak (see losing streak) takes back everything and more. If a robot promises "guaranteed recovery" or "no stop-loss", it almost certainly hides a martingale. It's exactly what our service catches with tail-risk Monte Carlo.
How to apply it, in practice
- Set your % per trade (1% is a good starting point) and compute the size with the position size calculator each time, on your current capital.
- Recompute as you grow or shrink. If your account goes from $10,000 to $12,000, your 1% is now $120, not $100. Let compounding work.
- Have a de-scaling floor. Many managers drop to half risk after a streak or big drawdown, until confidence returns. Never the other way (sizing up to "recover").
- Respect the ceiling. Even if Kelly says you can risk 15%, don't: the uncertainty about your real edge makes a quarter of that —or plain 1%— far safer.