Position Sizing (Course #0)
My very first course was going to be the winning rate. As I wrote down the other ones, I realized that position sizing, understanding what it is and how it works, was actually the most important part of it all. Therefore, I have decided to create this course #0 as the one you MUST take first to understand the other stuff.
Understanding position sizing is very tricky actually. The very first time I learned about it was with Crypto Cred. He’s got a lot of great courses on trading and Technical Analysis, I also recommend you checking him out.
So here is what most people think about doing: I will buy 100% of my account balance into bitcoin ($1,000 account), my account size will then be $1,000.
Or, I will buy with 15% of my account, so my position will be $150. Even better, I will go 10x and my position size will be $10,000.
This is great and all, but this is NOT how you should look at it.
Whenever you trade, you MUST – SHALL – HAVE TO HAVE – an plan on where and why do you enter, where you need to exit at profit AND where you need to exit at loss. If you don’t want to accept that, no good.
If you want to invest into something, you MUST – SHALL – HAVE TO HAVE – an plan on where and why do you enter, where you need to exit at profit AND where you need to exit at loss. If you don’t want to accept that, no good.
It’s like driving, you must know when to turn, accelerate and break.
So, because you will have a plan, you will know OR you will decide where to put your Stop Loss. For example, you want to put your stop loss the 20 EMA. Or, you want to put your stop loss at the low of the previous candle. Or, you want to put your stop loss 0.5% below your entry. Or, you want to put your stop loss at the previous support level.
Once you have decided where to put your Stop Loss, based on your strategy and on the structure of the market/chart, you will need to decide how much you will risk on that trade. Basically, trading is like betting. You will bet/risk an amount of money, hoping to make a profit.
To give you an idea, 1% risk is cool, if you want fast results you can go to 2-3% (of your account balance). Some great traders like to do 5-20%, but this is super high risk. 5-20% on an intraday trading strategy (in and out during the same day), then this is degen to me. On an intraday 1-2% risk per trade is good.
So now, you are starting to be good at position sizing: you know where your stop loss will be and you know how much you will risk.
Let’s go back to our examples of stop losses.
Example 1: you want to put your stop loss the 20 EMA
Example 2: you want to put your stop loss at the low of the previous candle
Example 3: you want to put your stop loss 0.5% below your entry
Example 4: you want to put your stop loss at the previous support level
On the above chart, here are the distance between your entry and the stop losses:
Example 1, the 20 EMA is 0.28% below your entry.
Example 2, the low of the previous candle is 2.30% below your entry.
Example 3, the stop loss is exactly 0.50% below the entry, like you decided.
Example 4, the previous support level is 4.60% below your entry.
Now let’s calculate your position size:
Magic Formula: Position size = Risk % / Distance to SL %
Example 1: 1% / 0.28% = 3.57 This means your position size will be 3.57 times your account balance.
Example 2: 1% / 2.30% = 0.437 This means your position size will be 0.437 times your account balance, so a little bit less than half of it.
Example 3: 1%/0.5% = 0.50 Your position size is equal to half your account.
Example 4: 1%/4.60% = 0.22 Your position size will be 0.22 times your account.
So now, do you understand that leverage should only be necessary when your strategy calls for a Stop Loss that is positioned at a distance that is less than your risk %? This is example 1. You should NEVER think “I want to use 10x” just for fun. You should only apply leverage because your position size calculation told you so.
Conclusion: Position Sizing is the calculation of how much should your position be, so that when you hit your SL, you only lose what you planned losing.
Position size = RISK % / DISTANCE TO SL %
Understanding position sizing is very tricky actually. The very first time I learned about it was with Crypto Cred. He’s got a lot of great courses on trading and Technical Analysis, I also recommend you checking him out.
So here is what most people think about doing: I will buy 100% of my account balance into bitcoin ($1,000 account), my account size will then be $1,000.
Or, I will buy with 15% of my account, so my position will be $150. Even better, I will go 10x and my position size will be $10,000.
This is great and all, but this is NOT how you should look at it.
Whenever you trade, you MUST – SHALL – HAVE TO HAVE – an plan on where and why do you enter, where you need to exit at profit AND where you need to exit at loss. If you don’t want to accept that, no good.
If you want to invest into something, you MUST – SHALL – HAVE TO HAVE – an plan on where and why do you enter, where you need to exit at profit AND where you need to exit at loss. If you don’t want to accept that, no good.
It’s like driving, you must know when to turn, accelerate and break.
So, because you will have a plan, you will know OR you will decide where to put your Stop Loss. For example, you want to put your stop loss the 20 EMA. Or, you want to put your stop loss at the low of the previous candle. Or, you want to put your stop loss 0.5% below your entry. Or, you want to put your stop loss at the previous support level.
Once you have decided where to put your Stop Loss, based on your strategy and on the structure of the market/chart, you will need to decide how much you will risk on that trade. Basically, trading is like betting. You will bet/risk an amount of money, hoping to make a profit.
To give you an idea, 1% risk is cool, if you want fast results you can go to 2-3% (of your account balance). Some great traders like to do 5-20%, but this is super high risk. 5-20% on an intraday trading strategy (in and out during the same day), then this is degen to me. On an intraday 1-2% risk per trade is good.
So now, you are starting to be good at position sizing: you know where your stop loss will be and you know how much you will risk.
Let’s go back to our examples of stop losses.
Example 1: you want to put your stop loss the 20 EMA
Example 2: you want to put your stop loss at the low of the previous candle
Example 3: you want to put your stop loss 0.5% below your entry
Example 4: you want to put your stop loss at the previous support level
On the above chart, here are the distance between your entry and the stop losses:
Example 1, the 20 EMA is 0.28% below your entry.
Example 2, the low of the previous candle is 2.30% below your entry.
Example 3, the stop loss is exactly 0.50% below the entry, like you decided.
Example 4, the previous support level is 4.60% below your entry.
Now let’s calculate your position size:
Magic Formula: Position size = Risk % / Distance to SL %
Example 1: 1% / 0.28% = 3.57 This means your position size will be 3.57 times your account balance.
Example 2: 1% / 2.30% = 0.437 This means your position size will be 0.437 times your account balance, so a little bit less than half of it.
Example 3: 1%/0.5% = 0.50 Your position size is equal to half your account.
Example 4: 1%/4.60% = 0.22 Your position size will be 0.22 times your account.
So now, do you understand that leverage should only be necessary when your strategy calls for a Stop Loss that is positioned at a distance that is less than your risk %? This is example 1. You should NEVER think “I want to use 10x” just for fun. You should only apply leverage because your position size calculation told you so.
Conclusion: Position Sizing is the calculation of how much should your position be, so that when you hit your SL, you only lose what you planned losing.
Position size = RISK % / DISTANCE TO SL %
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