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Crypto Futures Trading: Position Sizing, Leverage, and Risk Management Tactics for Successful

Explained: What is Position Sizing, Leverage and risk for Crypto Futures Trading Header Pictures
Explained: Crypto Futures Trading Position Sizing, Leverage and risk for Crypto Futures Trading Header Pictures

The bull run is upon us. In a bid to make as much profit as possible, a lot of crypto users will make costly mistakes regarding position sizing, leverage, and risk. As expected, errors like this can take a huge toll on your trading portfolio.

And you wouldn’t want that, would you? So, in this article, we’re covering tips on these three very essential concepts in futures trading. 

Without further ado, let’s dive in. 

Rule of Thumb for Risk Management in Crypto Futures Trading

For those who don’t want to delve too deeply into this topic or simply want a quick answer to the question: How much should I use per trade? Here’s a rule of thumb for you.

When trading, your position size should not be more than 5% of your total funds. It should be between 2% and 3%, giving you a total of 50 to 33 trades that you could open simultaneously.


Risk, Per Trade Risk, and Risk-Reward Ratio

Symbolic explanation risk-reward ratio picture
Symbolic explanation risk-reward ratio picture

Total Risk

In futures trading, total risk refers to the maximum amount or percentage of funds you will lose while using a trading strategy.

That is, if most or all of your trades go south and you lose money, total risk is the percentage of your capital that you will lose. This percentage is entirely dependent on your risk appetite.

How comfortable are you with losing 25% of your capital? How about 40%?

We recommend that you keep this percentage low if you just started trading and always set your stop loss levels in accordance with it. 

Risk Per Trade

Because of how profitable the crypto market can be sometimes, people often overlook how much risk they should take in trades. 

It’s common knowledge that: 

  • Low-risk is around 0.5%
  • Medium risk is within the range of 1%-1.5%
  • High risk is about 1.5%-2%
  • Very high risk is about 2%-3%
  • Once your risk is between 3% and 5%, you’re in degen territory.
  • And once it passes 5%, you’re gambling at that point.

You mustn’t forget that the most experienced traders still make back-to-back losses even with the best strategies. The longer you trade, the more likely you will experience tons of losses in a row. 

For instance, losing ten trades in a row with 5% risk eats up 50% of your capital. You wouldn’t want that, would you? 

Of course, playing safe will make you considerably less profit, but you’ll still be able to retain the money you make.

Risk-Reward Ratio (RR or RRR)

The risk-reward ratio (RR) is simply the ratio that defines the relationship between losses and potential profits for any trade. 

It’s the difference between your stop-loss level (the maximum amount you will lose at which you will close the trade) and the price at which you take profit. And this is a fundamental figure you must determine before entering any trade. Typically, you should aim to hit more profits than losses.

RR is expressed in ratios like 1:2, 5:1, etc.

Here’s how it works:

  1. Risk: As aforementioned, the “risk” in the ratio refers to the amount you are willing to lose on a trade. You can set this as a percentage of your trading capital or a fixed monetary amount.
  1. Reward: The “reward” is the potential profit you expect to gain from the trade. Like the risk, you can express it as a percentage of your trading capital or a fixed monetary amount.
  1. Ratio: The ratio itself is the comparison between the potential reward and the risk. For example, a 1:2 risk-reward ratio means that for every unit of risk taken, you expect to gain two units of reward.

For example, if you set a 1:3 risk-reward ratio, you’re willing to risk $100 to potentially make $300. If the trade goes as planned, the profit is three times the initial risk. If it goes south, and trust us, it can, you will lose $100.

Although riskier trades fetch potentially more profit if they go well, they can wreck your trading portfolio. So, using a high RR is always a bad idea because it’s unsustainable in the long run.

Position Sizing in Futures Trading

Position sizing is an integral part of crypto trading. It refers to determining the amount of capital or the size of a position you will use in a particular trade.

If your capital is $2000 and you’re planning to use $150 on a trade, your position size is 7.5% of your capital. 

Proper position sizing helps you manage risk and preserve your capital while ensuring you take advantage of a trade’s profitability. The goal is to allocate an appropriate portion of your trading capital to each trade, taking into account potential losses.

To size your position, you need to consider your account size or capital, your risk per trade and the distance to your stop loss.

Your account size is the total amount of funds you have set aside for trading. As we’ve already explained, risk per trade is the percentage of funds you’re willing to lose on a trade.

That leaves us with distance to your stop loss. This is the numerical measurement of the price difference between the current market price of an asset and the level at which you’ve set your stop-loss order.

For example, if you enter a long position at $100 and set a stop-loss at $95, the distance to the stop-loss is $5 (5%). If the current market price is $98, the distance to the stop-loss is $3.

Now that these are established, here’s a working formula to size your position.

Example of percentage losses in Crypto Futures Trading Pictures
Example of percentage losses in Crypto Futures Trading Pictures
  • Position size = (account size * risk per trade) / (distance to stop loss)
  • Position size = (account size * risk per trade) / (distance to stop loss)
  • Say your account size is $2000
  • You’ve set your risk per trade to 1.5%
  • And the distance to stop loss is 10%
  • Your position size is = (2000*1.5%)/(10%) = $300

This is an easy example to explain the risk-reward-ratio and position size for all crypto futures traders.


Using Leverage to Your Advantage

Leverage is an essential part of futures trading. It’s a feature that allows you to control much more than your capital. It involves borrowing funds to increase the size of a trade, amplifying both potential gains and losses.

Basically, the exchange acts as a broker, providing you with an exponential percentage of your capital to reach a certain amount. 

Leverage can potentially enhance your returns, but it also comes with increased risk as you’re literally at the mercy of the market if things go south.

Here’s an example: if you have $1,000 and use 10:1 leverage, you can control a position worth $10,000. If the market moves 1% in your favor, the gain would be $100 (10 times the 1% move). However, if the market moves 1% against you, the loss would also be $100.

So, if your account size is $2000, risk per trade is 1%, and the distance to stop loss is 5%. Your position size is (2000*1%)/(5%) = $400

You can use leverage to reach $4000, ensuring you make more profit. 

That is, you can take a leverage of 10:1. 

And you know it’s a relatively safe bet because your risk per trade is still 1%.

Make sure only to trade crypto assets you’re comfortable with losing, as crypto market conditions can be unpredictable sometimes. Always consider setting relatively safe stop loss levels before engaging a set-up. While you may make a lot of profits using its product, Crypticorn is not liable for any financial losses you incur when trading.

Accurate AI Crypto Price Predictions to Maximise your Trading Results
Accurate AI Crypto Price Predictions to Maximise your Trading Results

Conclusion

Risk, position sizing, and leverage are three major concepts that you must understand before you start intentionally making profits from futures trading.

In this article, we’ve covered essential details you need to know about these concepts. If followed, they can help you make safer, more sustainable trades. 

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