What is Position Sizing in Crypto Trading?
Position sizing is the process of determining how much of your capital to allocate to a single trade. It is the most important aspect of risk management.
Why Position Sizing Matters
Many traders obsess over entry and exit while ignoring size. Even with a high win rate, poor sizing can destroy an account.
Key Insight
A trader with a 40% win rate and proper position sizing can outperform a 60% win rate trader with poor sizing. Risk management beats prediction every time.
The Position Sizing Formula
The most common method is the percentage risk model:
Formula:
Position Size = Risk Amount / |Entry Price - Stop Loss|
Where:
Risk Amount = Account Balance * Risk Percentage
Example Calculation
Let's say:
- Account Balance: $10,000
- Risk Per Trade: 1% ($100)
- Entry Price: $50,000 (BTC)
- Stop Loss: $48,000
Step 1: Calculate stop distance
$50,000 - $48,000 = $2,000 (4%)
Step 2: Calculate position size
$100 / $2,000 = 0.05 BTC
Step 3: Position value
0.05 BTC * $50,000 = $2,500
The 1% Rule
Professional traders typically risk 0.5% to 2% per trade. The most common recommendation is 1%:
- 10 consecutive losses = 10% drawdown (recoverable)
- Allows for bad streaks without emotional damage
- Preserves capital for opportunity
- Reduces stress and improves decision-making
Common Mistakes to Avoid
Risking more on "sure things"
No trade is guaranteed. Consistent risk leads to consistent results.
Ignoring leverage in calculations
With leverage, small moves can wipe out positions. Always factor it in.
Moving stop loss to risk more
If the SL is too tight, reduce position size instead of widening the stop.
Test Your Knowledge
1 / 5What is position sizing based on?
Try It Yourself
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