Fixed Fractional position sizing

Most of us who have dipped their foot into the market are generally concerned about making money. The first rule I see of making money is to not loose what I already have. While its next to impossible not to loose a trade or two its imperative that I do not loose all or most of my trading capital.

I was lucky enough to stumble across the above term and although it sounds quite sophisticated, its quite a simple concept to implement.

Lets say, for an example, you have a total capital base of $100,000; then you divide the lot into 10 parcels of $10,000 each. You would only invest one parcel on one stock. So you are basically spreading the risk across ten stocks.

Now lets say you wish to trade a $1 stock with the first parcel.
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You don't wish to risk more than 5% of your capital on the trade.
So maximum risk is 10,000*5/100 = $500.

You plan to buy stock and think that a 5c stop would be best.
So $500/.05c = 10000 so you CAN buy 10000 with a 5c stop.

Lets say you think its going to run so you only have a 2c stop.
so $500/.02c = 25000 so you could maintain the same $500 risk and invest in $25000 of shares.

OK lets say you wish to use a wider stop can you still buy 10000 shares?
So $500/.20 = 2500 obviously no you can't. You must buy 2500 ONLY to maintain the same 5% risk with a 20c stop.

So same maths applies to any position you take.

$15300 capital, 5% risk how many shares can I buy of a stock trading at $1.92c with an 18c stop?

$ at risk = 15300 x .05% = $765.
765/.18c = 4250 shares 4250 x $1.92 = $8160 so you can ONLY buy 4250 shares at an 18 cent risk to maintain the same 5% risk to capital.

I'll go further and talk about Reward to Risk or the R/R ratio.
If you buy and then sell the $1.92 stock for a 54 cent profit you have returned on that trade a 3:1 R/R ratio.
This is calculated by 54c (the profit)/18c (The risk) = 3 so 3 times the risk has been returned.
So if you win 2 out of 3 trades with this sort of R/R ratio then your doing well.

I have a spreadsheet that does the above calculations and anyone of you need it I am happy to post it here. Other wise there are couple of free applications on the net that can do the calculation for you. Two of them are:
TradeSize Pro
This can be found here.

The other one is called MM Calculator and it can be found here.

Lemme know if you know of any other applications that do a similar job. Happy trading.