When trading cryptocurrencies and stocks, calculating your position size is an essential step to minimize risk and optimize profits.
In this guide, I will walk you through the four elements required to calculate your position size and provide you with the formulas for both long and short positions.
What is position sizing for trading?
Position sizing is the process of determining how much capital to risk on a single trade or investment.
It is a critical aspect of risk management in trading and investing.
Position sizing involves calculating the optimal amount of capital to allocate to a specific trade or investment based on factors such as account size, risk tolerance, entry price, stop-loss level, and market volatility.
Why should you use position sizing when trading?
The goal of position sizing is to minimize the risk of losses and maximize the potential for profits.
By managing the amount of capital invested in each trade, traders and investors can protect their portfolios from significant drawdowns and increase their chances of long-term success.
Effective position sizing helps traders and investors to stay disciplined and consistent in their approach to trading and investing.
The Four Elements Required to accurately calculate your position size
The following four elements are required to calculate your position size:
- Account Size – This is the total amount of USDT, Bitcoin, Ethereum, or any other cryptocurrency you have available for trading. Remember to include any open trades and update your account size once your trade is exited.
- Entry Price – This is the limit price at which your trading strategy tells you to go long or short. If you are entering your trade using a market order, use an approximation of your entry price that includes slippage.
- Stoploss Price – This is the price of your first stop-loss that would get hit if the position goes against you. If you don’t know where your stop-loss should be, learn how to determine your crypto stop-loss.
- Maximum Risk % – This is the maximum risk percentage you are willing to take for each trade. We recommend starting with a risk percentage between 0.5% and 1.5% to keep your equity safe from the high volatility of the crypto market.
Calculating Your Position Size
Using the four elements above, we will now walk you through the formulas to calculate your position size for both long and short positions.
1. Position Size Formula for a Long Position – This formula calculates the amount you should invest in a long position.
- Account Size: 1000 USDT
- Entry Price: 30,000 USDT
- Stoploss Price: 28,000 USDT
- Maximum Risk %: 1.5%
Formula: (Account Size * (Maximum Risk % X 0.01)) / (Entry Price – Stoploss Price) X Entry Price
Calculation: (1000 X (1.5 X 0.01)) / (30,000 – 28,000) X 30,000 = 225 USDT
2. Position Size Formula for a Short Position – This formula calculates the amount you should invest in a short position.
- Account Size: 1000 USDT
- Entry Price: 30,000 USDT
- Stoploss Price: 31,000 USDT
- Maximum Risk %: 1%
Formula: (Account Size * (Maximum Risk % X 0.01)) / (Stoploss Price – Entry Price) X Entry Price
Calculation: (1000 X (1 X 0.01)) / (31,000 – 30,000) X 31,000 = 300 USDT
Other types of position sizing
It is important that you find a position sizing method that fits with your personnality. The one above might not be the one for you.
These are other position sizing strategies that you could use:
- Fixed position sizing: This strategy involves risking a fixed amount or percentage of the trading account on each trade, regardless of the size of the trade or the level of risk involved.
- Volatility-based position sizing: This strategy involves adjusting the position size based on the level of volatility in the market. For example, a trader may choose to increase the position size when volatility is low and decrease it when volatility is high.
- Kelly criterion position sizing: This strategy involves using a mathematical formula to calculate the optimal position size based on the expected return and probability of success of the trade.
- Percentage of equity position sizing: This strategy involves risking a fixed percentage of the trading account on each trade. For example, a trader may choose to risk 1% of their account on each trade.
- Anti-Martingale position sizing: This strategy involves increasing the position size after a profitable trade and decreasing it after a losing trade, with the aim of maximizing profits while minimizing losses.
- Martingale position sizing: This strategy involves increasing the position size after a losing trade in the hope of recouping losses on the next trade. This strategy is often considered risky as it can lead to significant losses if a trader experiences a long losing streak.
Calculating your position size is crucial to effectively manage your trading risk and achieve optimal profits.
Use the formulas above and always keep your maximum risk percentage in mind. Alternatively, you can use a position size calculator to make your calculations easier.
This is what a position size calculator looks like. This kind of calculator will give you an exact size for your stock and crypto positions.
It can also inform you on the size of the leverage that needs to be used.
A good position size calculator should calculate for both Long and Short positions.