Module 12: Risk Management and Trading Psychology

Position Sizing

Chapter 3 of 14 · about 5 minutes

3.1 The same trade, two outcomes

Mint and Node took the same trade: long Bitcoin from $100,000, with a stop-loss at $95,000. The trade failed and both were stopped out.

Mint had sized the trade so the loss was 1% of the account. Node, feeling confident, had used leverage to open a position more than three times the size of the account. The loss was 18%.

"Same trade, same analysis, same stop," said Node. "But I lost eighteen times as much."

"Position sizing decides how much a wrong idea costs you," said Hash. "It's the single most powerful risk tool you have, and it's completely in your control."

3.2 Risk per trade

Module 4, Chapter 16 and Module 7, Chapter 14 introduced the core rule: decide how much of your account you're willing to lose if the trade is wrong, and size the position so that hitting your stop costs exactly that.

Position size = (account size × risk per trade) ÷ distance to stop

Value
Account$10,000
Risk per trade1% = $100
Entry$100,000
Stop$95,000
Distance to stop$5,000 per BTC
Position size$100 ÷ $5,000 = 0.02 BTC ($2,000)

If the stop is hit, the loss is $100, plus fees and any slippage.

Chapter 3 · Position sizing and heat

A position's size equals the account times the chosen risk percentage divided by the distance to the stop. With a $10,000 account risking 1% and a stop $5,000 away, the position is about 0.02 BTC. Five such positions put 5% of the account at risk in total, the portfolio heat, and correlated positions act as one larger bet.

Position size comes from the risk you will accept and your stop distance, not from conviction. Size equals account times risk percent divided by stop distance, and the risk across open positions adds up to your total portfolio heat.

3.3 Why 1% to 2%?

Many experienced traders risk 1% to 2% per trade. Here's why, using a simulation of a profitable strategy that wins 45% of the time and makes twice as much on winners as it loses on losers, over 200 trades.

Risk per tradeApproximate chance of a 50% drawdown at some point
1%Close to 0%
2%Close to 0%
3%Under 1%
5%~19%
10%~94%
20%~100%

This is a strategy with a real edge. Yet at 10% risk per trade, it would almost certainly suffer a 50% drawdown at some point, which, as Chapter 1 showed, needs a 100% gain to recover. At 1% to 2%, the same strategy survives comfortably.

"So the strategy didn't change," said Mint. "Only the bet size did."

"And bet size decided whether the edge mattered," said Hash.

3.4 Volatility-adjusted sizing

Different assets move by different amounts. As Module 4, Chapter 11 showed, a smaller token might move three times as much as Bitcoin on a typical day.

If your stops are based on volatility, for example 1.5 times the average true range, the stop distance automatically widens for volatile assets, and the position size shrinks.

BitcoinSmaller token
Price$100,000$10
Daily ATR as % of price2%6%
Stop at 1.5 × ATR3% below entry9% below entry
Risk per trade on $10,000$100$100
Position size$100 ÷ 3% ≈ $3,333$100 ÷ 9% ≈ $1,111

Both positions risk the same $100. The more volatile asset gets a smaller position. This keeps risk consistent across very different assets.

3.5 Sizing long-term holdings

Not every position has a stop-loss. Long-term investors often hold through large drawdowns. For them, sizing works differently: decide how large a drawdown you could tolerate on the whole position without it damaging your life or forcing you to sell.

Example. Node is willing to see a maximum loss of $15,000 from crypto holdings during a severe bear market. Bitcoin has historically fallen around 75% to 85% in deep bear markets (Module 1, Chapter 13).

Value
Maximum tolerable loss$15,000
Assumed severe drawdown75%
Maximum position$15,000 ÷ 0.75 = $20,000

For smaller tokens, which have often fallen 90% or more, the same tolerance supports a smaller position.

Asset typeAssumed severe drawdownMaximum position for a $15,000 tolerance
Bitcoin75%$20,000
Large tokens beyond BTC90%~$16,700
Small or speculative tokens100%$15,000, and usually much less

3.6 Portfolio heat

Portfolio heat is the total risk across all open trades: the amount you'd lose if every stop were hit at once.

Open tradeRisk
BTC long1%
ETH long1%
Token A long1%
Token B long1%
Token C long1%
Portfolio heat5%

Five trades at 1% each feels careful. But crypto assets are highly correlated (Module 10, Chapter 10). In a sharp sell-off, all five stops could be hit together. That's really one 5% bet on "crypto goes up," not five independent 1% bets.

Many traders cap total portfolio heat, for example at 5% to 6%, and treat highly correlated positions as one combined position.

3.7 Sizing up and down

SituationSizing adjustment
New strategy or learningSmaller than normal, such as 0.25% to 0.5%
Proven strategy, normal conditionsStandard size
After a losing streakMany reduce size until results recover
Extreme volatility or major eventsSmaller, or stay out
Feeling emotional or overconfidentSmaller (Chapters 8 to 11)

Hash's rule: "Increase size slowly, based on evidence. Decrease size quickly, based on doubt."

3.8 Try it yourself

Using your real or hypothetical account size, calculate the position size for a 1% risk trade on BTC and on a more volatile token, using stops at 1.5 times each asset's ATR. Then list all your current open positions and calculate your portfolio heat. Which positions are correlated enough to count as one bet?

Key takeaways from this chapter

  1. Position size equals account size times risk per trade, divided by the distance to the stop.
  2. Risking 1% to 2% per trade lets a profitable strategy survive losing streaks; 10% almost guarantees a deep drawdown.
  3. Volatility-adjusted stops automatically shrink positions in more volatile assets.
  4. For long-term holdings, size by the maximum drawdown you could tolerate without being forced to sell.
  5. Portfolio heat totals the risk across open trades; correlated positions behave like one larger bet.
  6. Increase size slowly based on evidence, and decrease it quickly based on doubt.