1
Sizing rule
Fixed shares, fixed dollars, volatility sizing, and fixed risk create different exposures.
Lesson · Backtesting and Trading Systems
Position Sizing and Portfolio Accounting
Track cash, equity, buying power, open positions, realized and unrealized P/L, rejected orders, and sizing rules throughout the test.
Core concepts
What to understand
Keep each definition operational so it can be implemented and tested.
2
Capital constraint
Orders must respect available cash, leverage, and reserved risk.
3
Portfolio state
Every fill updates quantity, cost basis, cash, equity, and open risk.
Interactive lab
Position Sizing and Portfolio Accounting Lab
Apply different sizing methods to simultaneous signals and observe exposure, rejected trades, and final equity.
Position Sizing and Portfolio Accounting Lab
Deterministic synthetic educational data · no live market connection
BACKTEST MODEL
Process
Update the ledger after every event
Portfolio state must be calculated in chronological order.
Size
Calculate quantity from the selected capital or risk rule.
Validate
Check cash, leverage, concentration, and open-risk limits.
Account
Update fills, fees, positions, cash, and mark-to-market equity.
Knowledge check
Check your understanding
Select one answer for each question. Feedback appears immediately.
1. A test that opens every signal without checking cash can:
The simulated portfolio may spend capital it does not have.
2. Fixed-risk sizing changes quantity when:
Quantity is derived from affordable loss divided by per-unit risk.
3. Unrealized P/L affects:
Open positions change mark-to-market portfolio equity.
4. Equity is $50,000, risk per trade is 1%, and the stop is $2.00 from a $50.00 entry. Fixed-risk sizing gives:
$50,000 × 1% = $500; $500 ÷ $2.00 = 250 shares; 250 × $50.00 = $12,500 of notional — the lab prints this line for its first signal.
Practical rules
- Process signals in a documented order when capital is limited.
- Track cash and open positions after every fill.
- Apply the same sizing rule throughout each test.
Common mistakes
- Sizing from ending equity instead of current equity.
- Ignoring rejected orders.
- Combining trade P/L without portfolio-level overlap.
References
Official reading
The labs are simplified simulations. These sources cover historical performance, data, costs, or execution limitations.
CME Group · Trading Simulator
Provides a practice environment for testing trading decisions without live capital.
Investor.gov · Understanding Fees
Reviews how fees and trading costs reduce investment results over time.