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One of the things that separates good traders from bad traders is risk management. Without proper risk management, you can lose money. One way to ensure that you maintain your desired level of risk is to always size your positions before trading. Position sizing helps you manage risk by allowing you to decide how much you want to risk on each trade and how much you want to earn on every trade. You need to constantly adjust your position size to keep your account under control.
What is position sizing?
Position sizing involves setting the actual percentage or portion of a crypto asset that you plan to risk when trading. When sizing a position, determine the percentage of total account value you are willing to let go of in the trade in relation to the rewards you expect to receive. Traders size their positions to reduce risk and determine how much they will make or lose from potential price movements.
How to calculate position size
To determine the size of a position for any trade, the following should be considered.
Risk per trade
You should decide how much you are willing to risk on any trade. This could be based on your desires, trading style, or appetite for risk. It is more common to advise a trader to stick to risking 1-3% of his trading balance on every trade he executes. Day traders try to keep the risk down in order to enter positions more often, but those who wait a long time to get a setup are a little more risky.
Suppose you have a trading balance of $5,000 and you choose to risk 2% of your initial balance on every trade. This means that even if the deal goes completely against your expectations, you will only lose $100. In this case, you need to lose 50 consecutive trades to lose your trading balance.
your stop loss level
Once you have decided on the amount or percentage to risk per trade, you need to know how to set your stop loss to fit your plan. You need to set a stop loss so that you don’t lose more than you decided before trading.
A stop loss is a predetermined position or level at which a trade will be exited if the market moves in the opposite direction. This tool will help you reduce your losses. A properly sized stop loss will manage your losses.
If you decide to risk 1% per trade, you should always keep your 1% target in mind, regardless of how far your stop loss is from the entry price. The position size is small when the distance from entry to stop loss is large, and high when the gap is narrow. With proper position sizing, high or low usage doesn’t matter. If the trade reaches the stop loss, he will only lose 1% of his capital.
Position sizing
Once you have determined the amount and stop loss you are willing to risk for each trade, you can use that information to calculate your position size.
To calculate your position size, you should use the following formula:
Position size = Risk amount/Distance to stop loss.
Suppose your account size is $1,000 and you choose to risk 1% per trade. This means that if your trade goes against your prediction, you lose $10. Let’s say you buy ETHUSD with an entry price of $1,570 and a stop loss of $1,550. Using TradingView’s price range measurement tool, the distance between the two values is 1.27%, which is 0.0127 when converted to decimal.
To calculate the position size, multiply the account size by the risk percentage (1% (0.01) in this case) and divide the result by the distance to the stop of 0.0127.
So 1,000 x 0.01 / 0.0127 and the position size is $787.
You don’t have to perform the calculations yourself all the time. Some platforms have tools you can use to calculate your position size, some of which are listed in the next section.
5 Crypto Position Size Calculator
There are automated tools that help with position sizing. Using them eliminates the need to perform calculations manually. Let’s take a quick look at 5 position sizing calculators that you can use when trading.
1. Bybit Risk: Reward Calculator
Bybit’s Risk-Reward Calculator comes in the form of extensions. Integrate into your browser for easy access whenever you need it. To get the desired value, you need to enter your stop loss level, margin, risk and leverage in the tool.
2. TradeCrypto Bitcoin Trading Position Size Calculator
TradeCrypto is a website that provides resources on how to trade, and its webpage also includes a position sizing calculator. You can get your position size simply by entering a number in the available box. This calculator does more than just show you the amount of risk. It also displays the size of the cipher value. This is useful if you are trading on a platform that requires you to enter crypto lot sizes instead of USD values.
3. CBFX Bitcoin Lot Size Calculator
CBFX provides users with calculators to calculate position sizes in various financial markets, including cryptocurrencies. As with any calculator, just enter basic information. The calculator can be embedded on your website and can be set in any color you like.
4. Binance Futures Position Calculator
The Binance Position Size Calculator is another automated tool that can help you calculate your position size. This tool comes in the form of an extension that you can plug into your browser for easy access whenever you need it.
5. Crypto Position Size (CPS) Calculator
Similar to other tools described, to get the position size, you need to enter your account balance, entry price, stop loss and risk percentage. The CPS Calculator offers additional functionality as you can enter trading fees to calculate your positions and calculate more accurate values.
Always adjust position size before trading
Calculating position size is easy and automated tools simplify the whole process. Not determining the size of your position before executing a trade will only put your account at risk. Because you cannot determine how much you will lose if you lose the trade. Then it will be difficult to get a stable profit. Practice with a simulated account or a very small amount to make sure you understand how position size is calculated before trading with a large account.
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