Using a position size calculator is the first step to risk management and becoming a successful trader. Managing risk means you never blow your account and lose all your money, and thus get to “fight another day”.
How do you calculate crypto position size:
- Determine the amount you are willing to risk on this trade.
- Identify your entry price and stop loss.
- Use the results to get the correct position size.
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What is a position size calculator?
A position size calculator is a traders best friend. It allows your to calculate the exact position size for your trades. Calculated position sizes are key to sound risk management. The position size is calculated with the following formula:
[(Account size * risk %) / (Entry price - Stop Loss)] * Entry Price
Even seasoned traders hate to admit: they are wrong more often than they are right. But how do they still end up making profits? Short answer: they keep their losses to a minimum.
Smart traders use risk management and calculate their position size according to their trading balance. When their balance increases, so do their positions. The same holds true vice versa. When their balance decreases, their positions decrease.
The primary benefit of this can be explained as follows: imagine you start out with $1000 USD and you decide that your risk appetite per trade is 2%. Btw, this number might not seem high – but even for professional traders this is a big percentage. Back to the example:
2% of $1000 means that the trader will risk $20 on the trade. If he/she is wrong, the new balance will be $980. For the next trade, the trader will not risk $20 again. Instead, a new position size will be calculated:
2% of $980 is $19.60. Do you see what is happening here? As the trader is losing, the position sizes will decrease. This makes sense for multiple reasons:
- As the trader is on a losing streak, the balance will deplete slower.
- As a result the trader will have more chances to play and win.
- It takes the emotion out of sizing the position, and ensures the trader will not lose confidence and do stupid things.
- As the trader starts winning again, the position sizes will increase again.
Calculating position sizes takes emotion out of the equation. Often, when traders go on a “winning spree” they will get cocky and double or triple their position or even go all in. This is a surefire way of getting rekt.