Position Sizing and Risk Management

One of the most overlooked aspects of trading and investing with beginners is proper risk and capital management, however it is the most important component of your trading if you intend to be consistently profitable.

Most beginner traders and investors will just enter a trade with a random amount of capital, perhaps place a stop limit order (stop loss) or not and then wonder why they experience large drawdowns. More often than not, these large drawdowns will void many winning trades, leaving them frustrated.

The way around this is to have a consistent capital management and position size strategy, which needs to be executed flawlessly in order for you to be profitable in the long run. A simple example of such strategy could be entering a trade all at once with a constant risk percentage each trade or scaling into your trades by splitting your capital in half and doing two separate position size calculations. For beginners, risking around 1% to 2% of your capital each trade is ideal.

For example; you have $1000 and your strategy involves going all in at once with a 2% risk per trade. Each asset you wish to buy is $10 and based off the chart, your stop loss is at $9.6, 4% below your entry price. Using the calculated linked below, you determine your position size to be 50 units.

This is just a simple example of a position size strategy that will help you limit your drawdowns. There are many complex strategies out there, the main point to take away from this is that you need to be flawless and consistent.

Use this calculator to determine the exact amount of any asset, you should buy to remain within your risk tolerance, it will save you a lot of money.

https://docs.google.com/spreadsheets/d/1gV4E3A5sNi9E7RKI5pifweao2G-eoNEorG9mwue5q80/edit#gid=0