Position Size In Crypto Trading || How is it calculated?

_{screenshot of my trading signal}

Proper risk management is needed in every trade done by a Trader no matter how big your portfolio may be. You will need to exercise proper risk management schemes or you may end up blowing your account and incur losses that you may not be able to recover from.

It would be so bad seeing your progress in previous trades being wiped out by one single trade. When it comes to trading or investment, one fundamentals you should note is to avoid trading with emotions as it may affect your trading decision. Emotions play a very huge part in financial risks, so we as Traders need to keep these emotions which may include fear in checks so I to avoid losing or getting your trading affected.

That is the reason why there is a trading system which acts as set of Rules one can follow during investment or trading activities to avoid losing in anywhere. These rose help one to manage risks in the crypto market as well as avoid making unnecessary decisions. These rules won't allow you make decisions that are hasty and repulsive.

With these trading rules, you will need to consider setting determinants like, what is your risk tolerance? How much capital you are using to trade and how much capital you are willing to risk? That is why you always hear, risk what you are willing to trade and trade what you're willing to lose.

This article is a determining factor on how big your trading account should be and how much of it you are willing to risk in a single trade.

This is the very big step one minute valid consideration especially to the newbies in crypto. It will help them allocate certain parts of their portfolio to different strategies and also reduce the chances of risking too much money. Let's take this as an example.

Let's say you believe in the future of Bitcoin and have a long-term position on a hardware wallet. It is best if you don't count this as part of your trading capital. So to determine your account size, you need to look at the available capital that you can allocate to a particular trading strategy and the likes.

I know of a crypto trader who bought bitcoin on long-term basis with $10k and placed it on a futures trade. Bitcoin was at $54 when he bought not until it rose to $70k as of today. He may have seen losses but keeping his emotions in check and also believe in the future of bitcoin made him hold on to the investments without selling and incurring losses feeling it may reduce even further.

This involves setting of percentage of your available capital of which you'll be willing to lose or risk on a single trade. It is more like the stop loss level. When given a signal especially for beginners, you'll be told to set 5% or less of your available capital in case the market turns around. The 2% rule is a trading strategy suitable for investment involving only a few or longer-term positions.

It is exclusive for less volatile instruments than cryptocurrencies. It would be life-saving to be even more conservative if you're starting out as a new trader. The 1% rule dictates that you shouldn't risk more than 1% of your available capital in a single trade. This does not mean that you only enter trades with one percent 1% of your available capital as most crypto newbies do.

It means that if your trade idea is wrong and your stop-loss is hit, you'll only loss 1% of your available capital used in trading.

You can do this by looking at where our trade idea is invalidated. This applies to almost any strategy when it comes to investments. This determination is also based in individual trading strategy and setup. The invalidation point of a trader can be based on support or resistance area which are technical parameters or on indicators.

So determining trade risk is majorly on individual basis where you'll have to decide for yourself what strategy suits your style and determine the invalidation point of a trade based on that.

To calculate position size, let's take this example. You have $10k in your account and that you're using the 1% rule which means you can't lose more than $100 on a single trade. When the market goes otherwise, we lose and exit with the $100 loss, assuming our invalidation point is 50%.

Account size: $10k
Account risk : 1%
Invalidation point: 5% which is distance to stop-loss.

The formula for this is= Account size × Account risk / Invalidation point= 10k × 0.01 /0.05 = Position size= $2000

By following this strategy and exiting, we may have larger potential loss. So to utilise this model properly, we should take into account the fees we will pay and potential slippage. So let's increase our invalidation point with the same formula. Let's say it's 10%.

Account size × Account risk / Invalidation point= 10k × 0.01 /0.1 = Position size= $1000

In conclusion, we have seen how to calculate account size is calculated . Knowing how to calculate this will protect us from incurring losses of any sort.

All screenshots are from my binance and trades sent to students.

Disclaimer :Any financial and crypto market information provided in this post was written for informational purposes only and does not constitute 100% investment advice. It's just basic knowledge every crypto trader or investor should have