Order Flow OS

Risk Engine — Vol IX

Risk & Position Sizing

Position sizing formulas, daily/weekly/monthly limits, portfolio heat, and the High-Water-Mark drawdown tier system — straight from the Volume IX Master Formula Sheet.

Position Size Calculator

Contracts = (Equity × Risk%) ÷ (Stop points × $/pt) — round down

Risk Amount

$500

Position Size

0

Portfolio Heat

1%

Quick Desk Card cap: heat ≤3.5%; correlated instruments (e.g. ES+NQ) count as one factor, ≤2% combined.

Daily Loss Limit (2%)

$1,000

Weekly Limit (4%)

$2,000

Monthly DD Threshold (7%)

$3,500

Drawdown Tier & Recovery (HWM System)

Drawdown from HWM

0%

Shallow tier

Normal operations; watch for streak patterns and DLL proximity

Review cadence: Standard journal

Size multiplier this tier: 100% of normal · Recovery gain required to reach breakeven: 0%

Shallow (0-5%)100% size
Moderate (5-10%)63% size
Deep (10-15%)50% size
Critical (15-20%+)0% size
Position Sizing Methods (Ch. 2)

Fixed Fractional

Contracts = (Equity x Risk%) / (StopPoints x $/pt)

Risk a consistent percentage of equity per trade. The default professional method — auto-compounds and de-compounds with account size.

Fixed Dollar

Contracts = RiskDollars / (StopPoints x $/pt)

Simpler but inflexible — does not scale with account growth or drawdown automatically.

Volatility-Adjusted (ATR)

Contracts = (Equity x Risk%) / (N x ATR x $/pt)

Stop distance set as N x ATR so size automatically shrinks in high-volatility regimes and grows in quiet ones.

Kelly Criterion

Kelly% = W - ((1-W)/R)

Optimal bet sizing for a known edge (W = win rate, R = avg win/avg loss). Use Half-Kelly or Quarter-Kelly as a research ceiling only — never full Kelly live.

Risk of Ruin — Streak Probability

P(n consecutive losses) ≈ (1 − Win Rate)^n — baseline i.i.d. estimate

3 losses in a row

12.5%

5 losses in a row

3.13%

8 losses in a row

0.39%

10 losses in a row

0.1%

Current rolling expectancy: 0.00R over 0 closed trades. Use this alongside win rate — a low win rate with strong R can still be a strongly positive-expectancy system.

Volume IX Quick Desk Card
  • •Primary job: preserve capital. Secondary job: make money.
  • •Size: Contracts = (Equity x Risk%) / (Stop points x $/pt); round down.
  • •Default risk 1%; DLL 2% hard; weekly 4%; monthly drawdown threshold 7%; heat <=3.5%.
  • •Correlated instruments (e.g. ES+NQ) = one factor, <=2% combined heat.
  • •50% of DLL used -> pause; 75% -> half size; 100% -> flat.
  • •HWM drawdown 10% -> half size; 20% -> stop and review.
  • •Setup grade C/D = no trade. A-only in deep drawdown.
  • •Never add to losers. Pyramids pre-allocated, <=2% total risk.
  • •Pre-news heat <=1.5% or flat. Holiday/OPEX/FOMC modifiers on.
  • •No briefing, no trading. No log, session incomplete.
  • •When psychology reads red: half size or flat — automatic, not negotiable.
  • •Round contracts down. Always.
  • •The tighter risk layer always wins in a conflict.