Risk & Sizing

Risk management is the engine of compounding. We avoid outcome‑chasing and let a sizing framework do the heavy lifting. Two simple methods cover most needs: fixed‑fraction and volatility‑scaled. Both can coexist—use fixed‑fraction for swing trades and vol‑scaled for tactical adds.

1) Fixed‑fraction sizing

Risk a constant fraction of equity per trade (e.g., 0.5–1%). Position size = (risk per trade) / (stop distance). If your invalidation is $25/oz away and you risk $500 per trade, your size is 20 oz equivalent. This keeps losses linear and predictable.

2) Volatility‑scaled sizing

Scale position to a volatility proxy (e.g., ATR). Target a constant daily variance contribution. When volatility expands, size shrinks automatically; when it compresses, you can allocate a bit more. This maintains steadier equity volatility and improves sleep quality.

Invalidation: where ideas die cleanly

Stops live where your thesis breaks—structural levels, not round numbers. We use daily closes beyond invalidation to avoid intraday whipsaws. A clean loss is cheaper than three messy ones.

Drawdown math (respect the cliff)

• −10% needs +11.1% to recover; −20% needs +25%; −30% needs +42.9%.
• As drawdowns deepen, the recovery burden grows non‑linearly. This is why risk budgets matter more than “finding the top or bottom”.

Portfolio‑level controls

• Risk budget: cap simultaneous exposures so a single theme can’t sink you.
• Regime triggers: when VIX/vol spikes, switch to options or slow accumulation; when vol normalises, restore trend sizing.
• Max daily loss: a circuit breaker that forces you flat after a preset loss (e.g., −1.5% of equity).

Execution rules that compound

1. Pre‑commit: define size and invalidation in writing.
2. One playbook per trade: trend pullback or divergence—not both.
3. Journal outcomes by setup, not by “win/lose”; learn which setups deserve more capital.

What changes in gold specifically?

Gold trades as a macro asset with slower mean‑reversion than many equities. Give trades room, anchor to weekly levels, and avoid over‑trading intraday noise. Treat currency effects explicitly if you mark P&L in non‑USD.

Bottom line: Protect the left tail and the right tail looks after itself. Sizing + invalidation beat prediction.