Risk Management — Position Sizing

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Risk Management — Position Sizing

Post by jesse »

Risk Management sounds more complicated than it really is but it is possibly the most important part of trading .. You can be the best analyst in the world but if you do not manage your risk you will blow up your account eventually. By objectively evaluating risk on every trade and sizing your positions effectively your capital is always protected. Every time you place a trade you need to ask yourself, at what point am i going to admit that I was wrong and exit this position at a loss ? Then based on that maximum possible loss, how much of my account am i prepared to lose on this trade ? Tyler has often recommended risking no more than 2-4% of your account on any given trade … how much you want to risk is your decision but you must make the decision consciously and execute objectively every time.

For simplicity, since I am spreading my position across multiple price levels I use my order at the 50 ema level for calculating my expected risk on each trade but if you are very keen you can calculate risk separately for each individual order and adjust your position size accordingly. Although I do not use hard stops, I use the bottom of the ocean / top of the underworld as my estimated stop loss. I then check the percentage change in price between the entry level at the 50 ema and estimated stop loss to give me my total estimated risk on the trade. Then depending on how much of the account I want to risk I will size the position accordingly.

A note on leverage : I recommend that all new traders trade only on spot. Cryptocurrency is highly volatile and you do not need large amounts of exposure to make meaningful returns in a short period of time. Most importantly never use leverage to take on risk beyond what you would normally accept if you were trading spot. Personally I like to trade BTCUSD using leverage (Perpetual Swap) and ALT pairs on Spot. When BTC is in a bull market I like having my account balance in BTC and maintaining a long position by default. Then when I get good signals on BTCUSD I can dial up exposure to suit my risk tolerance … although I have to pay funding rates I know that as long as my balance is increasing in BTC i am always beating the market and I am more conservative with my risk becuase any mistakes will cost me directly in BTC. I make sure to never risk liquidation because my stop is always in front of my liquidation price and I use low leverage. In general I take greater risk trading Alts on spot then I do trading BTCUSD on leverage.
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