cryptotradingbook

Position sizing in practice

Foundations → Intermediate · ~12 min read

At a glance

  • Position size is derived, not chosen: risk amount ÷ stop distance.
  • 1% risk per trade is the common professional default; 5% is gambling territory.
  • Volatility, not conviction, determines stop distance - and therefore position size.
  • The same logic inverts for account survival: a -50% drawdown needs +100% to recover.
  • Use the calculator - never trade a size you did not compute.

1. The formula that rules everything

Position size = risk amount ÷ stop distance %. With a $10,000 account, 1% risk ($100) and a 4% stop distance, the position is $2,500 - not $10,000. This is the single most important number in the book, and it is arithmetic, not judgement.

ACCOUNT$10,000RISK / TRADE1 % = $100STOP DISTANCE4 %POSITION SIZE$2,500position size = risk amount ÷ stop distance %Entry$50,000Stop $48,000(−4%)risk zoneSame $100 risk: tighter stop → bigger position; wider stop → smaller.
Figure 6.1 — Position size is derived, not chosen: account × risk% ÷ stop distance. The ladder below shows a concrete example at $50,000 entry.

2. Choosing the risk per trade

1% survives 20 consecutive losses with 82% of the account intact. 5% after 20 losses has 36% left - recovery requires +150%. The risk % is your only lever against loss streaks that are statistically inevitable.

3. Volatility sets the stop, the stop sets the size

A wide stop on a volatile altcoin means a small position; a tight stop on a quiet market allows a larger one. Reversing that order - "I want to be big, so I'll tighten the stop" - is how accounts die: the stop gets hit by noise.

Remember: Never decide the position size first and then place the stop where it "fits". The stop is a market decision; the size is the consequence.

4. Practice: the calculator

Use the Position Size & Risk/Reward calculator. It shows the formula, the resulting position and warns when the position would exceed the account (leverage territory). Do three practice runs: 1% risk on a 3% stop, 2% on a 6% stop, 0.5% on a 10% stop. Notice: same dollar risk, wildly different positions.

5. When this fails

The model assumes the stop executes near its level. Gaps, illiquidity and leverage break that assumption - this is why the liquidation price matters before any leveraged trade.

Risk: Over-sizing is the account-killer in crypto. Volatility of 5%+ per day at 10x leverage means stops are hit by noise, and liquidation is closer than the chart suggests.

Knowledge check

  1. Account $20,000, risk 1%, stop distance 5%. Position? ($400.)
  2. Why is 5% risk per trade dangerous despite a good strategy? (Loss streaks are inevitable; recovery from -64% needs +178%.)
  3. You want a bigger position. What is the legitimate lever? (Accept more risk per trade - consciously - or find a genuinely tighter stop in a calmer market; never move the stop closer arbitrarily.)
  4. What assumption does the formula make that crypto violates? (Exact stop execution - gaps and slippage can exceed the planned loss.)
  5. Same $100 risk on a 3% vs 10% stop - which position is bigger, and why? (The 3% stop position: $3,333 vs $1,000 - tighter stops allow larger size.)