Position Sizing
How to determine appropriate position sizes for risk management
Documentation
What is Position Sizing?
Position sizing is the process of determining how much capital to risk on each trade. It's one of the most important aspects of risk management and can be the difference between long-term success and failure in trading.
Mathematical Approach
Use formulas and calculations to determine optimal position sizes based on risk parameters.
Risk Control
Limit potential losses to preserve capital and ensure long-term trading survival.
Profit Optimization
Balance risk and reward to maximize returns while maintaining acceptable risk levels.
The 1% Rule
The most fundamental position sizing rule is to never risk more than 1% of your total account balance on a single trade. This rule helps ensure that even a series of losses won't significantly damage your account.
Example Calculation
Benefits of 1% Rule
- • Protects against catastrophic losses
- • Allows for many consecutive losses
- • Reduces emotional stress
- • Enables consistent risk management
- • Preserves capital for opportunities
Variations
- • Conservative: 0.5% per trade
- • Standard: 1% per trade
- • Aggressive: 2% per trade (experienced only)
- • High-confidence trades: Up to 3%
- • Never exceed 5% under any circumstances
Position Size Calculation Methods
Fixed Dollar Amount Method
Risk the same dollar amount on every trade regardless of account size.
Formula: Position Size = Risk Amount ÷ (Entry Price - Stop Loss Price)
Example: Risk $100, Entry at 36.50, Stop at 36.00
Position Size = $100 ÷ (36.50 - 36.00) = $100 ÷ 0.50 = 200 USDT
Percentage Risk Method
Risk a fixed percentage of your account balance on each trade.
Formula: Risk Amount = Account Balance × Risk Percentage
Example: $10,000 account, 1% risk
Risk Amount = $10,000 × 0.01 = $100 per trade
Volatility-Based Method
Adjust position size based on market volatility using indicators like ATR.
Formula: Position Size = Risk Amount ÷ (ATR × Multiplier)
Example: Risk $100, ATR = 0.30, Multiplier = 2
Position Size = $100 ÷ (0.30 × 2) = $100 ÷ 0.60 = 167 USDT
Position Sizing with Leverage
When using leverage, position sizing becomes more complex as you need to consider both your risk amount and the leverage multiplier.
Leverage Position Size Formula
Example: 10x Leverage
- • Account: $10,000
- • Risk: 1% = $100
- • Entry: 36.50, Stop: 36.00
- • Stop Distance: 0.50
- • Position Size: $100 ÷ 0.50 = $200
- • Margin Required: $200 ÷ 10 = $20
Example: 50x Leverage
- • Account: $10,000
- • Risk: 1% = $100
- • Entry: 36.50, Stop: 36.40
- • Stop Distance: 0.10
- • Position Size: $100 ÷ 0.10 = $1,000
- • Margin Required: $1,000 ÷ 50 = $20
Advanced Position Sizing Strategies
Kelly Criterion
Mathematical formula that calculates optimal position size based on win rate and average win/loss.
Formula: f = (bp - q) / b
Where: b = odds, p = win probability, q = loss probability
Confidence-Based Sizing
Adjust position size based on your confidence level in the trade setup.
- • High confidence: 1.5-2% risk
- • Medium confidence: 1% risk
- • Low confidence: 0.5% risk
Market Condition Adjustment
Modify position sizes based on current market volatility and conditions.
- • High volatility: Reduce position size
- • Low volatility: Normal position size
- • Trending markets: Slightly larger sizes
- • Choppy markets: Smaller sizes
⚠️ Position Sizing Mistakes to Avoid
- • Risking too much on a single trade (over 2-3%)
- • Increasing position size after losses (revenge trading)
- • Not adjusting for correlation between positions
- • Ignoring leverage when calculating risk
- • Using the same position size for all market conditions
- • Not considering slippage and fees in calculations
💡 Position Sizing Best Practices
- • Always calculate position size before entering a trade
- • Use position sizing calculators to avoid errors
- • Review and adjust your risk percentage regularly
- • Consider correlation when holding multiple positions
- • Keep detailed records of your position sizing decisions
- • Practice position sizing calculations until they become automatic