Almost everything written about backtesting focuses on when to get in and when to get out. Hardly anything covers how much to risk on each trade, yet that variable can (and should) be backtested too. Dynamic and fixed position sizing (deciding how big each trade is) produce different equity curves from the exact same sequence of trades.
Fixed position sizing: the starting point
You risk the same percentage of your account on every trade: for example, always 1%, whether you're coming off a winning streak or a losing one. It's simple to backtest and simple to execute. It's also the right approach while you're still validating your entry and exit rules. Keeping your size constant isolates those rules, so you can judge the strategy itself without the extra noise of a size that keeps changing.
Dynamic position sizing: risk that adjusts
The size of each trade changes according to a rule you set in advance, not according to how you feel in the moment. Two common approaches:
- Based on volatility: you trade smaller when the market is moving more than usual (for example, when the ATR, or Average True Range, a measure of how far price typically moves per candle, is high), and larger when volatility is low. The goal is to keep your risk in dollars roughly constant even when your risk in pips changes.
- Based on your streak: you trade smaller after consecutive losses and scale back up gradually during winning streaks. This protects your capital when recent results suggest something isn't working the way you expected.
Your position size is just another variable in your system. You test it like any other; you don't make it up as you go.
See plansHow to backtest each approach
Take the same sample of trades, from the same journal, logged without hindsight bias, and calculate two equity curves: one with fixed sizing and one with your dynamic rule, applied to the exact same sequence of winners and losers. Comparing them reveals something no win rate or risk/reward summary shows on its own: how each approach behaves during losing streaks, which is where they differ the most.
| Criterion | Fixed | Dynamic |
|---|---|---|
| How easy it is to backtest | Easy | Moderate: you have to apply the rule trade by trade |
| Behavior during a losing streak | The same dollar risk throughout the streak | Shrinking risk, if the rule is streak-based |
| Execution demands | Low | High: one miscalculation affects every trade |
| Best for | Validating entries and exits for the first time | Fine-tuning a strategy that's already validated |
Validate your entries and exits with fixed sizing first. Only bring in dynamic sizing on a strategy that has already held up in your backtests.
See plansWhy this matters before a prop firm challenge
If you're aiming for a prop firm challenge, streak-based dynamic sizing fits well with the trailing drawdown rule many firms use (a loss limit that moves up as your account reaches new highs). Cutting your size after consecutive losses helps you stay clear of the limit that knocks most traders out of the challenge. Backtesting that rule before you trade it live tells you whether you can really execute it with discipline, not just whether it sounds good in theory.
Frequently asked questions
- Is dynamic position sizing more profitable than fixed sizing?
- Not automatically. It changes the shape of your equity curve (more exposure during winning streaks, less during losing ones), but it demands more disciplined execution. Executed poorly, dynamic sizing can do worse than fixed sizing.
- Should I start with dynamic position sizing if I'm new to backtesting?
- No. Master fixed sizing first, until you have a solid backtesting sample of your entries and exits. Adding another variable (your size) before that point makes your results needlessly harder to read.
- How do I backtest dynamic position sizing if my tool doesn't simulate it?
- You can apply it by hand to a journal you've already completed. Recalculate each trade's result as if its size had been whatever your dynamic rule would have called for at that moment, then compare the resulting curve with the fixed-size one.
- Is volatility-based position sizing the same as streak-based sizing?
- No. They're two different ways to adjust the same size. Volatility-based sizing cuts your size when the market is moving more than usual, regardless of your results. Streak-based sizing cuts your size after consecutive losses, regardless of market volatility. You can combine the two.
- What risk per trade is reasonable to start with?
- Risking 1% of your account per trade is the most commonly cited starting point in the trading community, both for fixed sizing and as the ceiling for dynamic sizing. It isn't a universal rule, but it's a sensible anchor while you build your own track record.
- Can I backtest dynamic position sizing in Trade & Repeat?
- You set the size of each trade when you mark it, so you can simulate a dynamic rule by hand, adjusting the size trade by trade. There's no automatic rule that calculates it for you yet.
Keep reading: Manual vs. automated backtesting: differences, pros and cons · From backtesting to a funded account: what really changes when you go live · How to read your backtesting statistics
Educational content only; it is not financial advice. Trading financial markets involves the risk of losing capital.