Position Size Analysis Crypto Trading 101

understanding position size crypto trading guide

How to Find The Best Position Size to Reduce Risk

Discover How Important is Position Sizing in Crypto Trading and Learn How to Calculate Your Position Size to Run a Low-Risk Plan of Action.

When we all pitched our hats into the crypto trading arena, we sought to study many different investment techniques to help us gain an edge in the market. These techniques usually involve technical analysis mainly focused on when to buy or when to sell.

Basing our analysis of many indicators to choose from, we create trading rules to follow.

In this article, I want to go over a critical but often overlooked point. Your Position Size! Although there are many indicators to use, their main focus is market timing (we all want to hit the highest bid and take the lowest bid). These indicators never teach the most crucial component.

This component is. How much to trade? The “how much” is more important than the timing of the indicator. If you’re a smart trader, you want to know any low, high, and close info. However, for you to see, you must be using the correct position size.

When allocating funds to a particular investment, you will use position sizing to calculate how much you can buy based on your risk tolerance and goals.

By determining the appropriate position size upfront, you can have more control of the risk in your trading portfolio and maximize its potential for gains.

Managing risk is one of the most important aspects of crypto trading, as it is essential to ensure that your account stays positive over the long term. That and appropriate position size is a necessary skill to practice good risk management.

Position size is one great way to manage your risk. It is the risk in the number of trades you place. Because the risk in each buy you take will also affect the size parameters of your position and, in turn, will affect the size of your trading account.

Once you understand how to size your trades correctly and you’ve calculated yours based on your account balance and trading preferences, you can input those numbers in your crypto bot trading limit values. More on that later.

Position Size Overview

To calculate the ideal position size in your trading account, you first need to figure out your stop and risk levels.

Your stop level is the point at which you’re willing to walk away from a trade, and your risk level is the percentage or dollar amount of your account that you’re ready to gamble on any given transaction.

Once you have determined these, you can calculate your ideal position size.

The steps and calculations to determine the size of your trade position are simple. Here’s an overview of the steps to follow and some examples to help explain the process.

  • Decide how many crypto coins you want to keep in your portfolio.
  • Determine your account risk
  • Determine your purchase price. Use the method in this helpful article to determine the purchase price.
  • Set your stop loss. The stops mentioned may be set at a specific price based on your reading of the chart, or it may be a percentage based on your calculation of the coin’s volatility.
  • Calculate the position size. (I will give you the formula later).

What is position size?

Briefly, position size refers to specifying how many units or how much of your account you are risking on a particular trade. It is not enough to determine the risk percentage per trade or the dollar amount you are willing to lose.

You need to know how to convert that percentage or amount into the number of units you need to buy or sell for a cryptocurrency pair.

Position size refers to the number of contracts or altcoins you need to place in a trade. The risk in each exchange you take will also affect the size parameters of your position and, in turn, will affect the size of your portfolio shrinkage.

In other words, the larger the size of the position you are trading, the greater the risk of your portfolio. Conversely, the larger the position you are trading, the greater the potential for higher returns.

This way, you can take too much risk in one transaction. It can also prevent you from being surprised when your losses are too significant, or your winnings are too small.

Calculating the correct position size will give you an idea of how much you could lose or how much you could gain on a trade.

To get started, you need to estimate how much of your account you’ll be comfortable losing if the trade doesn’t go your way.

From there, you need to get the value of the pair you are trading. Using these variables, you can calculate the number of units to trade.

Of course, you should also remember that higher risk leads to higher reward potential, and lower risk can also mean lower returns.

You need to be able to balance the line between risking too much and risking too little.

After all, you don’t want to have a slight potential for profit after all the hard work you’ve put into analyzing the markets and creating a good trade setup.

Ultimately, sticking to the correct position size and sound risk management practices can be the determining factor in your profitability.

Therefore it will prevent your account from exploding into a series of losses on particular trades and allow you to adjust your risk preferences based on your confidence in the transaction.

Now, let’s elaborate more on the above points.

How to Determine Account Size

Your account balance is pretty easy to calculate. But then, you need to calculate how much of that balance you are willing to allocate to different trading strategies.

Commonly, most traders tend to risk 1 to 3% of their total balance on a single trade. It is infrequent to risk a higher percentage because losses can quickly accumulate and wipe out your trading account.

For example, having an open order of maybe $10,000 BTC in your trading account, it’s best not to consider that as your capital. Because anything can happen, and you can lose. So basically, your account size is the amount you are willing to risk in trading overall.

How to Determine Account Risk

determine account risk

It is also essential to determine how much you are willing to lose on a trade. By choosing the percentage risk, you are ready to lose on a transaction. Typically, there is a general rule of risking 2% of your total capital.

The 2% Risk Principle

One of the first rules a trader is likely to learn is always using a stop loss to manage risk. There is also a rule of not risking more than 2% of the total value of your trading account in a particular trade.

Still, if you’re a new trader, you’re using a trading bot, or you want to be more cautious, feel free to change this value to 1% or lower instead. On the other hand, feel free to raise it to 5% if you’re more aggressive and willing to take more risk.

The main idea is to risk a percentage you are comfortable losing.

For instance, if you invest 25% of your account size in a trade, with a stop loss of 5%, the overall transaction will risk around 2% of your account’s value.

Without a doubt, the 2% principle and the stop loss are significant for risk management. However, it won’t account for the risk of a coin price spike through the stop loss price or slippage when there is insufficient liquidity to execute the stop-loss order at the wanted price.

Using my trading account, for example, I usually never invest more than 1% of the value of my trading account in a single trade. Across my account, I will be investing in 10-15 positions, each relatively small, to protect my general account from catastrophic single position events.

I will strongly suggest you be extra cautious when trading on margin or futures.

risk per trade calculation example

Using a Stop Loss Based on Volatility

Using a stop loss based on volatility and the 2% principle still does not handle the worst-case scenario when the price exceeds the stop-loss value. To start dealing with these worst-case scenarios, you can further reduce the position size.

The approach I take is to limit the overall capital that I will invest in a single trade to 1% of the value of my trading account. If you multiply the current coin price by the number of assets invested, you will reduce the maximum total amount at risk and the position’s size again.

For example, buying five different coins, ETH, XRP, BTC, BNB, and LTC, investing $500 on each would cost 5 x $500, or $2500. In the worst-case scenario, all of that 2500$ would be at risk.

However, if you reduced the position size price to 250, only $1250 would be invested in the positions. Reducing the position size more in this way means that you could lose a maximum of 1% of your trading account balance in the worst case.

How to Determine Your Trade Risk

How do you find out your trade risk?

It is simple. Once you have identified your account size and account risk, it is paramount to decide on the position sizing of your specific trades. You can begin to calculate the number of coins you are going to purchase.

The rule is to take good money management from the monetary risk by controlling your stake with the size of the position. Think in terms of the percentage you’ve earned, not the profit you’ve made. Practice and keep practicing.

There are many ways to determine this for specific trades. Some traders use the analysis of market fluctuations to establish these points, while others use volatility indicators. But these are just a few examples; there are hundreds of them.

However, you must have a stop loss value in place before calculating your trade position.

For example, if you trade BTC/USDT and the price was $50000 and set your stop loss at $40000, you will stay on the trade until the value drops to $39999. Once you have determined the stop loss, you can calculate your position size.

determine your trade risk

Using Position Size Based on Volatility

A helpful risk management technique is to value the position for volatility.

Instead of using a fixed percentage of a coin price for a stop loss, or investing a fixed rate of the account value in each position, use a multiple of the coin’s recent average volatility to calculate a stop-loss (determined using the ATR indicator).

At the same time, keep your capital at risk well below 2%.

For example, assuming you have a trading account value of $100,000 (which includes both cash and market value of current positions), you don’t want to risk more than 1% per trade, and the average volatility of the share is $2.

The total amount at risk for the transaction must not exceed $100,000 * 0.01 or $1,000.

How to Calculate Your Position Size

We have talked about all the necessary things to put in place before calculating your position size, from determining your account size to determining your account’s trade risk.

Now, how do you calculate your position size?

Calculating the position size is straightforward. Let’s say you had an account balance of $20,000 and were willing to risk 1% per trade. Plus, you know you’ll set your invalidation value at 5%.

This way, you would calculate by looking at the invalidation point, and to find it, you have to consider the size of the coin you will be trading.

Using the following position size formula

Account balance X account % risk per trade / (Stop loss distance from the presumed entry price) = Position size

Using an account size of $20,000 for example ($ 20,000 X 0.01) / (0.05) = $4000 Here we have our position size to be $4000.

Using this calculation, we have determined that the appropriate position size for this trade is $4000. It is essential to consider the leverage ratio and the margin required to trade $4000 if you’re margin or futures trading.

Position size to keep the risk around 2% per trade may work well with a $25,000 account, but if you only have $1,000, it’s only $20, which doesn’t let you invest much.

With micro accounts, a risk of $20 will usually be your position with an invalidation point of stop loss of 100, which is enough for almost any trade.

The reason for the deviation has to do with the variables that go into the calculation. First, you are willing to risk a certain percentage.

Changes in your risk percentage will change the amount you are ready to risk. The stop-loss price will then affect the amount you are willing to risk.

Look at a calculation. Each variable helps establish how much you are willing to risk. It gives you the power to calculate the size of your position dynamically. It helps you assess the risk you are taking in establishing a position.

Position size is a great way to add trade discipline to your investing decisions. There are several position size calculators available online. The one described here follows the dynamically calculated approach, allowing you to modify various factors to establish the best position size for your portfolio.

Smaller Position Sizes

With more significant positions, the price fluctuations could be shocking. In addition to controlling the financial risk of negative news affecting an asset’s price, targeting smaller position sizes also helps your trading.

If you have 10-15 relatively short positions on my account, you will not lose sleep in any situation. Smaller position sizes give you a “healthy level of indifference” to the price movements of a single position. To demonstrate how this works, let’s increase our stop loss value to 10%.

$20,000 X 0.01 / 0.1 = $2000

Here our position size has changed. We now have it at $2000. Using more minor transactions gives you more conviction to hold a position and let it go as planned.

Gunbot Position Size

If you’re trading manually, it can be difficult to avoid making emotional decisions regarding trading or investing. When the stakes are high strong emotions, can lead to risky behavior. That’s why you’ll need to control them to avoid making mistakes.

And what better tool to control your emotions than our automated crypto trading program?

You can’t control every outcome, but planning your trading system will help you manage risk and make emotionless decisions in the heat of the moment.

A sound trading strategy is difficult to develop on your own, but with Gunbot by your side, that’s something you won’t have to worry about.

How can you apply what you have learned about position sizing to Gunbot?

You can do it by adding your position size value to your strategy balance settings, more specifically, the TRADING LIMIT (TL) value.

It is straightforward, and it’s a Gunbot global setting which means it will apply to any pair using that strategy.

Here’s an example of how your strategy balance settings look in the Gunbot GUI

gunbot trading limit example in GUI

When trading with Gunbot, be mindful of the base currency established by the exchange because your trading limit value gets bounded to the “base currency.”

Gunbot’s default trading limit value is set in Bitcoin (as shown in the above screenshot). So if you’re trading the USDT-BTC pair, make sure you edit this with a whole number, telling Gunbot you want to sell X amount of USDT per trade.

Usually, you would set 10, 25, 100, or similar instead of 0.002.

Similarly, you would adjust your trading size if you’re trading on markets where BNB, ETH, or similar coin is the base currency.

Always use a number a bit higher than the minimum required by the exchange rules, so you got some room to pay the fees.

Note: If you’re margin or futures trading, this value will represent your wanted number of contracts.

You also have the choice of setting a percentage of your available base currency if you prefer. If you put a value here above 0, it will tell Gunbot to ignore your TRADING LIMIT, and it will use the set percent in its place.

And lastly, you can use all your available base currency balance, which I won’t recommend, but is ultimately your choice.

Conclusion

It is incredible how small changes in risk management can have such a significant and positive impact on your trading strategy.

The position size effectively determines how many coins you can buy without exceeding your maximum loss.

Also, the position size helps you to limit the number of losses incurred in the trade. It is part of an investment strategy that enables you to decide on the size of the coin to enter into in each transaction.

Things for you to Remember:

  • Your position size is NOT the same as your risk amount. Still, it originates from it.
  • You need to know your risk amount, your entry, and stop-loss to calculate your position size.
  • To calculate your position size, divide your risk amount by your stop loss distance.
  • The closer your stop loss is to your entry, the bigger your position size will be.

With the above examples, even beginner trader can adequately position their trade size without risking too much in a single position.

You will get prepared regardless of what happens in any situation. You will never be afraid of taking significant losses.

Using this concept is what differentiates professional crypto traders from average traders.

This article has helped explain what position size means in layman’s terms, the benefits, and how you can incorporate it into your trading.

It takes a bit of time to master, but there are online tools that can help you calculate your position size simply by providing account balance, risk percentage, currency pair, stop loss, and position size. However, to be extra careful, you should be able to do that on your own as well.

Crypto trading and investing are not just about making money but also about keeping your risk in check. Position sizing is an excellent approach that helps traders and investors decide how many units of security they can purchase, which helps control risk and maximize returns.

Remember, as a trader; you won’t control what the market will do next. The only control you have is how much exposure you will have to the movements of the crypto markets you trade and then, ultimately, your total portfolio exposure.

Every trader has to deal with risks daily. Unfortunately, most traders don’t have a trading strategy that takes into account position sizes and stops.

Gunbot is your strategy’s engine; let it take over your trading and maximize your profit automatically today.

gunbot position size

CryptoDROI is a Gunbot Official Reseller, Experience the Difference! Exclusive Customer Service so You can Learn Fast and Profit. Take Advantage of 50% Off Discount License Prices + Unconditional Support. Get Gunbot the Ultimate Crypto Trading Bot Now!