Understanding Position Sizing for Prop Trading

Here's a scenario you might recognize: You find a great setup. High probability, clean chart, everything lines up. You size up because you're confident. The trade goes against you. Now you're down 3% on the day from a single trade, and your prop firm's daily loss limit is 2%.

Evaluation over. Account blown. All from one "high conviction" trade.

Position sizing isn't glamorous. Nobody posts about it on Twitter. But it's often the difference between traders who pass evaluations and those who restart them over and over.

Why Size Matters More Than Entry

Most traders obsess over entries. "Where do I get in?" They spend hours backtesting indicators, perfecting their setups, finding that edge.

Then they blow their account because they sized wrong.

Here's the thing: a mediocre strategy with proper sizing will outperform a great strategy with reckless sizing. Every time. Your win rate doesn't matter if one loss wipes out ten wins.

The Simple Math That Saves Accounts

Let's start with the classic 1% rule: never risk more than 1% of your account on a single trade.

For a $50,000 prop account, that means:

• Maximum risk per trade: $500
• If your stop is 10 points on NQ (worth $20 per point): $500 / $200 = 2.5 contracts, so you'd trade 2
• If your stop is 4 points on ES (worth $50 per point): $500 / $200 = 2.5 contracts, so you'd trade 2

The tighter your stop, the more contracts you can trade while keeping the same dollar risk. The wider your stop, the fewer contracts.

This isn't about being conservative. It's about staying in the game long enough for your edge to play out.

How Algo Bread Handles Sizing

You've got three main options when setting up your automation:

Fixed Contracts

Set a specific number—say, 2 contracts per signal. Simple and predictable. The downside: your dollar risk varies based on your stop distance.

Risk-Based

Define your risk amount ($500, for example), and the system calculates contracts based on your stop distance. This keeps your dollar risk consistent across different setups.

Percentage-Based

Risk a percentage of your current account balance. As you grow, your size grows. As you draw down, your size shrinks. This protects you during losing streaks and lets you capitalize during winning ones.

Most experienced traders use risk-based or percentage-based sizing. Fixed contracts work for simpler strategies or when you're just getting started.

Prop Firm Rules You Can't Ignore

Prop firms have specific limits, and violating them ends your evaluation instantly:

• Daily loss limits: Usually 2-3% of account value. Hit this and you're done for the day—or forever.
• Trailing drawdown: Your maximum drawdown often trails your high watermark. Make $2,000, and your max loss threshold moves up too.
• Position limits: Many firms cap how many contracts you can hold at once.

The smart move: build these rules into your automation. Algo Bread can enforce daily loss limits and position maximums automatically. You won't have to rely on willpower in the heat of the moment.

A Real Example

Let's say you're trading ES on a $150,000 prop account:

• Daily loss limit: $3,000 (2%)
• Your strategy averages 3 trades per day
• You want buffer room, so max risk per trade: $800

With a typical 8-point stop on ES ($400 per contract), you'd trade 2 contracts maximum.

That might feel small. It might feel like you're leaving money on the table. But here's what it actually does: it keeps you in the evaluation. It gives your strategy room to work. It lets you survive the inevitable losing streaks.

The Emotional Payoff

There's a psychological benefit to proper sizing that nobody talks about.

When you know your worst-case scenario, when you've already accepted the risk before entering, trading gets calmer. You're not watching every tick, calculating how much you're down, feeling your chest tighten as the trade moves against you.

You sized correctly. If it stops out, you lose what you planned to lose. That's it. On to the next one.

That mental clarity is worth more than any indicator.