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Sizing on closed equity

Basing position size on realised account value, ignoring unrealised profit in open trades.

Closed equity is cash plus realised profit and loss. Sizing off it means a winning open position does not increase the size of your next trade until it is booked.

This is the conservative choice and usually the correct one for discretionary traders. Open profit is not yours yet: it can evaporate in a gap, and sizing off it means one reversal simultaneously shrinks your equity and reveals that everything you added was oversized. Compounding on paper gains is how good months turn into bad quarters.

Example: $50,000 closed equity with $8,000 of open profit. Closed-equity sizing risks 1% of $50,000 = $500. Open-equity sizing risks $580 and rises further as the winner runs. The difference looks trivial per trade and is not trivial across a correlated book.

Related: sizing-on-open-equity, compounding-position-size, open-trade-risk

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

How a position size is worked outAccount size, risk per trade and stop distance feed into one box giving the number of shares.ACCOUNT SIZE$25,000your capitalRISK PER TRADE1%of the accountSTOP DISTANCE$0.50entry to stopPOSITION SIZE500 sharesrisk budget: $25,000 × 1% = $250position size: $250 ÷ $0.50 = 500 shares
Working out a position size. Three numbers decide how big a trade is: the account, the share of it put at risk, and the distance from entry to stop. One percent of $25,000 is a $250 budget, and a $0.50 stop divides into that 500 times.
Compounding against a flat returnTwo account balances over fifteen years at the same yearly rate: one curve bends upwards as gains are left in, the other rises in a straight line.ACCOUNT VALUE$10k$20k$30k$40k051015YEARSCOMPOUNDED 10% a yearSIMPLE: 10% of the original sumboth start at $10,000 and run 15 years$41,772DIFFERENCE$16,772$25,000
Compounding against a flat return. Two accounts start at $10,000 and earn 10% a year for fifteen years. Leaving the gains in means each year earns on a larger balance, so the curve bends away from the straight line and ends $16,772 higher.

Educational only, not advice. Spotted an error? Post in Site Feedback.