A starter on position sizing
Let’s talk about position sizing for a bit. Why? Because this is something you want to stick to without compromise when trading. It’s also something that can kill your account really quickly when done badly.
To get started with position sizing we first need to take a look at our overall risk percentage. The accepted number generally lies somewhere around 1%. But what does this mean? Let’s clarify with an example. Imagine that you have a total trading portfolio size of 1 BTC and apply a risk percentage of 1%. This means that you are comfortable
1 BTC * 1% = 0,01 BTC
So how does risk percentage factor into your trading? By simply following this rule it means you never risk more than 1 percent of your entire account value on a single trade. This significantly lowers the risk of blowing out your entire portfolio on a trade that’s gone south. However, that doesn’t mean that you’re only trading with 0,01 BTC for each trade!
A few things factor into how big your position size can be once you’re applying the 1% risk management factor: your entry price, your stop loss price
- Total portfolio size: 0,1 BTC
- Entry price: 0,00001200 BTC
- Stop price: 0,00001100 BTC
- Risk percentage: 1%
Using the following calculation we can figure out how much of a position we can take to ensure that we only lose 1% of our portfolio if our stop loss is hit:
Let’s do the math using the example above
((1/100)*0,1) / (0,00001200 - 0,00001100) = 1000 units
Applying risk management and consistent position sizing is key to becoming more profitable. Not being able to take bigger positions while keeping a low risk level is a common misconception that I hope I’ve cleared up with the examples above.
As this post shows, I’ve been stopped out quite a few times (3 out of 5) so far. However, due to adequate position sizing, it hasn’t had much of an influence on the overall portfolio. To make my position sizing easy I’ve built this little calculator for Mac. Give it a try if you have a Mac 🙂