If you want to become a profitable trader,
You need to master these 3 things:
Position sizing, Leverage, and Risk.
The boring topics that actually give you a real edge.
Note: I don’t recommend using leverage, this post is for the traders among us.
Let start:
1. Risk
Your total risk is the maximum loss limit before you stop trading with a strategy.
Can you handle losing 25% of your capital? How about 50%?
Defining your risk before entering any trade helps you avoid liquidation.
2. Risk per trade
Risking 5% a trade sounds little to many traders.
But what if you lose 10 trades in a row? That's 50% of your capital gone.
You also need to make 100% of your money back to simply return to break even.
This is why traders should use a proper risk breakdown.
It's lower than you think but is the best way to manage drawdown.
Anyone trading for more than 3+ years knows how damaging 10 consecutive losses are.
This will protect you:
3. Position Sizing
You only need to know 3 things to calculate position sizing:
-Account size
-Risk per trade
-The distance of your stop loss
Here's the formula we use to calculate it:
For example,
If your account size is $20,000
Risk per trade is 1%
Distance to stop loss is 10%
Then your position size = (20,000*1%) / 10% = $2,000
4. Leverage
Most traders don't understand leverage.
Leverage simply changes the position size of your trades.
It does not mean you'll make high profits because your total risk % will still remain the same.
Here's an example of where you'd use leverage:
If your account size is $10,000
Risk per trade is 1%
Distance to stop loss is 0.5%
Then your Position size = (10000*1%)/(0.5%) = $20,000
$20,000 is bigger than your total account size so you can use leverage to reach this.
Using leverage is fine here because you'll still maintain 1% risk per trade.
Even with 100X leverage, your Dollar loss amount remains the same as without leverage.
Then, you can use leverage to keep less money on exchanges to reduce total risk to your capital.
