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's arguably the most important aspect of risk management and can mean the difference between long-term success and blowing your account.
Why Position Sizing Matters
Many traders focus obsessively on entry and exit points while ignoring position size. This is a critical mistake. Even with a 70% win rate, improper position sizing can lead to account destruction.
🎯 Key Insight
A trader with a 40% win rate and proper position sizing will outperform a trader with a 60% win rate and poor position sizing over the long run. Risk management beats prediction every time.
The Position Sizing Formula
The most common method is the percentage risk model. Here's how it works:
Formula:
Position Size = Risk Amount / |Entry Price - Stop Loss|
Where:
Risk Amount = Account Balance × Risk Percentage
Example Calculation
Let's say you have:
- Account Balance: $10,000
- Risk Per Trade: 1% ($100)
- Entry Price: $50,000 (BTC)
- Stop Loss: $48,000
Step 1: Calculate stop loss 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 between 0.5% and 2% of their account per trade. The most common recommendation is 1%. Here's why:
- 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 a sure thing. Consistent risk leads to consistent results.
❌ Ignoring leverage in calculations
With leverage, small price moves can wipe out your position. Always factor it in.
❌ Moving stop loss to risk more
If your SL is too tight, reduce position size instead of widening the stop.
Try It Yourself
Use our free position size calculator to practice these concepts:
Open Calculator