Most new traders fixate on finding the perfect entry. Seasoned ones? They fixate on risk. The truth is, you can be wrong a lot and still grow your account—if your position sizing is disciplined and your risk/reward (R/R) makes sense. This guide lays out the core formulas, frameworks, and mindset shifts you’ll need to stop gambling and start thinking like a pro.
TL;DR for the Impatient
- Start by deciding how much you’re willing to lose per trade (1% of equity is a solid default).
- Position size = (Account × Risk%) / (Entry – Stop), factoring in slippage and fees.
- Only take trades with R/R of at least 2:1. Ideally? Aim for 3:1.
- Keep total open risk (portfolio heat) in check—think 3–6% max.
- Leverage doesn’t change risk, just the margin you put up.
Step 1 — Set a Risk Budget Before You Even Look at a Chart
The very first question isn’t “Where do I enter?”—it’s “How much am I willing to lose if I’m dead wrong?”
For spot trades, a 0.5%–1.0% risk per trade is the norm. Leveraged or volatile markets? Dial it back.
- New and learning: stick to 0.5%
- Consistent with a decent win rate: bump to 1%
- Trading wild altcoins or low-liquidity tokens? Cut that risk even further.
The point of a small risk budget isn’t to avoid losing—it’s to survive long enough to win.
Step 2 — Position Sizing: The One Formula You Can’t Skip
Here’s the core formula:
Position Size = (Account × Risk %) / (Entry Price − Stop Price)
That’s it. For longs. For shorts, flip the denominator to (Stop − Entry).
But don’t forget friction—fees, slippage, rounding. These matter more than you think.
Quick Spot Example:
- Account: $10,000
- Risk per trade: 1% = $100
- Entry: $2.00
- Stop: $1.80 → Risk/unit = $0.20
- Size = $100 / $0.20 = 500 tokens
Now factor in:
- 0.1% fee in/out = ~$2
- Slippage of $0.01 = new risk/unit = $0.21
- Adjusted size = $100 / $0.21 ≈ 476 tokens
Futures With Leverage Example:
Same trade. With 5× leverage, your margin is $952 ÷ 5 ≈ $190. Risk is still $100. Margin just determines how much capital gets locked, not how much you’re risking.
Step 3 — Think in “R” and Insist on Good R/R
“R” is just shorthand for your per-trade risk.
- Stop loss hit = −1R
- 2:1 target = +2R
- 3:1 target = +3R
Now use R-multiples to assess expectancy:
E(R) = p × Avg Win − (1 − p) × Avg Loss
Say you win 40% of trades, average 2.5R wins, and lose 1R on losses:
E(R) = 0.4×2.5 − 0.6×1 = +0.4R
That’s +0.4% per trade on average if you’re risking 1% per trade. Decent.
Step 4 — Place Stops Based on Logic, Not Fear
Good stop placement is rooted in structure, not emotion.
- Structure-based: Below support/above resistance. Break = trade invalidated.
- Volatility-based: Use ATR (Average True Range).
ATR Example:
- Price = $2.00
- ATR(14) = $0.15
- Stop = $2.00 − 2×ATR = $1.70
- Risk = $0.30 → Size = $100 / $0.30 ≈ 333 tokens
Don’t crowd your stops on volatile assets—tight stops get wicked out.
Step 5 — Watch Portfolio Heat and Correlation
Portfolio heat = total risk from all open positions. Keep it manageable.
- Suggested cap: 3R–6R total
- That could be six 1R trades, or three 2R trades.
Also, mind correlation. If you’re long BTC, ETH, and SOL—they’re all part of the same storm. Limit overlapping risk.
Pyramiding (adding to winners): okay if it’s controlled. Just make sure your new stop still respects your total risk cap—or trail the original to free up room.
Step 6 — Use Loss Limits and a Kill Switch
Daily and weekly loss limits stop tilt before it starts.
- Daily cap: −2R
- Weekly cap: −6R
- Hit the limit? Stop trading. Step away.
Have a drawdown rule, too: e.g., if you’re down 10% from your peak, cut your risk per trade by half until you recover.
Step 7 — Leverage Isn’t the Devil, But It’ll Burn You If You’re Reckless
Leverage gets a bad rap, but it’s not the problem—it’s poor sizing.
- Always keep your liquidation price far beyond your stop.
- Leave buffer margin. You want room to breathe, not walk a tightrope.
- Beginners: stick to isolated margin. If one trade blows up, it doesn’t drag your whole account down.
Bottom line: Leverage multiplies whatever you’re doing. That includes mistakes.
Step 8 — Factor in Fees, Slippage, and Funding
Execution friction eats into your edge.
- Fees: Maker/taker, borrow rates, withdrawal—build them into your R.
- Slippage: Gets worse in fast markets or on low-liquidity tokens.
- Funding (for perps): If you’re long and paying funding every 8h, your real R/R drops over time.
Use limit orders when possible. And know your environment—fast-moving news cycles mean fast-moving books.
Step 9 — Journal in R, Review in Cycles
If you’re not journaling, you’re guessing.
Track:
- Trade setup
- Entry / Stop / Target
- Position size
- Outcome (in R)
At the end of each month, calculate:
- Win rate
- Avg Win (R), Avg Loss (R)
- Expectancy (R)
- Max drawdown
- Worst streak
If your system breaks down—or you break down—adjust. Risk less. Trade smaller. Refine your edge.
Pre-Trade Checklist (Worth Printing)
✅ Did I define my risk in dollars and R?
✅ Is the R/R at least 2:1?
✅ Is the stop logical (not emotional)?
✅ Is this correlated with other positions?
✅ Am I under my daily/weekly risk limits?
✅ Are fees/slippage/funding priced in?
✅ Am I trading the plan—or forcing something?