Table of Contents

• Introduction
• How to Determine Account Size
• How to Determine Account Risk
  • 2% rule
• How to determine trading risk
• How to calculate position size
• Summary

Introduction

No matter how large your investment is, you need to carry out appropriate risk management. Otherwise, it will lead to rapid loss of account funds. Gains gained over weeks or months can be wiped out by one poorly managed deal.

The basic goal of trading or investing is to avoid making emotional decisions. When it comes to financial risk, emotions play a large role. You need to manage your emotions when making trading or investment decisions. So specifying a set of principles for investing and trading activities will be of great help.

We call these principles Trading Strategies. The strategy is all about managing risk while eliminating unnecessary decisions. A trading system will not allow you to make hasty and impulsive decisions whenever you are making decisions.

When you create these strategies, you need to consider many factors. These include investment period, risk tolerance, amount of investment, etc. There are many solutions that can be thought of, but in this article we will focus on how to determine a position for a single trade.

To do this, we first need to determine the size of your transaction and the degree of risk you are willing to take on a single transaction.

How to Determine Account Size

Although this may seem like a simple and redundant step, it is still It needs to be considered carefully. Especially if you are a new entrant, this will help you identify different strategies for different portfolios. This way you can more accurately track the progress made by different strategies while reducing risk.

For example, suppose you believe in the future prospects of Bitcoin and collect it in a hardware wallet for long-term holding. It is best not to use this part of funds as part of investment capital. This means that determining account size is all about looking at and determining the amount of capital that can be allocated to a specific trading strategy.

In other words, determining account size is to review and determine the amount of funds that can be allocated to a specific trading strategy.

How to determine account risk

The second step is to determine account risk. This process indicates how much risk (percentage of capital) you are willing to take on a single trade.

2% rule

In the traditional financial world, there is something called the 2% rule investment strategy. According to this principle, the risk of a single transaction should not exceed 2% of the account. We will discuss in detail what exactly this means later, and now we want to adjust this number to accommodate the volatility in the cryptocurrency market.

The 2% principle investment strategy is suitable for investment styles that require only a small amount of long-term positions. and are typically tailored for instruments with lower volatility (relative to cryptocurrencies). If you are an active trader, especially a novice, this conservative strategy will become a "life-saving straw." In this case, we adjust it to the 1%Principle.

This principle means that the risk you take on a single transaction should not exceed 1% of your account. And does this mean trading with only 1% of your capital? of course not! This value means that if your trading concept is wrong, the stop loss will be triggered and you will only lose 1% of the account funds.

How to determine trading risk

Up to now, we have determined the account size and account risk. Next we will determine the position size for a single trade.

Now let’s examine when a trading idea doesn’t work.

This process is critical and applies to almost any strategy. When trading and investing, financial losses should be said to be inevitable in the process. Trading and investing are a game of probability, and even the best traders are not guaranteed to always make a profit. In fact, some traders make more predictions wrong than they are right, but still end up making a profit. How did this happen? Overall, it comes down to proper risk management, developing a trading strategy and executing it rigorously.

Therefore, every trading idea should have a failure point. In other words, when the market conditions are contrary to our initial concept, we should exit the current situation to reduce losses. On a more practical level, this means that we place a stop loss order at a certain location.

The determination of the failure point depends entirely on personal trading strategies and setting habits. This failure point can be based on technical parameters such as support or resistance levels. Or it could be based on other factors such as indicators that disrupt market structure.

There is no "universal" point in the market to determine stop loss. You must determine the investment strategy that best suits your style and identify ineffective points based on that strategy.

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How to calculate position size

Now we have the method to calculate position size All elements. Let's say we have $5,000 in our account. We have set the risk on a single transaction to not exceed 1%. This means that our loss in a single transaction cannot exceed $50.

Suppose we have completed the market analysis and determined that the failure point in our trading concept is 5% of the entry amount. When market conditions are unfavorable and losses reach 5%, which is $50, we will launch a trade. In other words, 1% of our account is 5% of the position.

• Account size – $5000
• Account risk – 1%
• Invalid point (stop loss range) – 5%

The formula for calculating the position size is as follows:

Position size = Account size*Account risk/Failure point

Position size= 5000 x 0.01 / 0.05 (USD)

$1000 = $5000 x 0.01 / 0.05

The position size for this trade should be $1,000. Following this strategy and exiting the trade when the failure point is reached will reduce losses. To use this model correctly, you also need to take into account the transaction fees payable. Also, you should take the risk of depreciation into consideration when trading illiquid assets.

To explain the principle, we increase the invalid point to 10%, while leaving the other factors unchanged.

Position size=  $5000 x 0.01 / 0.1

$500 = $5000 x 0.01 /  0.1

Our stop loss range is now twice as large as it was originally. So, if you were willing to take the same amount of loss on your account, your position size would be half of what it was before.

Summary

The calculation of position size is not arbitrary. It includes account risks, invalid points of trading concepts and many other factors, all of which need to be considered before trading.

Another important aspect of this strategy is execution. Once you determine the position size and expiration point, you cannot overwrite it when the trade becomes active.

The best way to learn risk management principles is to practice them. Head over to Binance and put your new understanding to the test.