Risk · Concept note
Position Sizing
A risk-management method that sets position size from the loss allowed on one trade and the stop distance.
Definition
Position sizing starts by deciding how much of the account may be lost, before considering conviction or expected return. Dividing that risk budget by the distance between entry and stop gives a base quantity, assuming the stop fills as planned.
Why it matters
Even a sound strategy can damage an account when positions are too large during a losing streak. A consistent risk unit makes trades across prices and volatility easier to compare and helps control drawdown.
Calculation and example
Position quantity = allowed loss ÷ |entry price − stop price|
With a 10,000 USDT account and a 0.5% risk limit, the allowed loss is 50 USDT. If BTC entry is $60,000 and the stop is $59,000, the $1,000 price risk gives a base size of 0.05 BTC. Fees and expected slippage should reduce the final size.
What to check when interpreting it
- Place the stop from market structure first, then calculate quantity.
- Reserve an extra buffer for costs and gaps.
- Treat highly correlated positions as one risk group.
Common misconception
Lower leverage alone does not reduce risk. Notional exposure, stop distance, and execution together determine the final loss.