Position Size and Risk Calculation

Why calculate position size

Position size — a key component of risk management. Even if the trade direction is correct, an oversized position can quickly lead to a significant drawdown. The goal is to select a position size where the potential loss does not exceed your predefined limit.

What to consider when calculating position size

1. Exchange fees (especially important for short trades) — on both entry and exit

2. Possible slippage during sharp market moves

3. Deposit currency and quote currency (USDT, BTC, etc.)

4. Leverage (covered separately below).

⚠️ Core principle — position size does not define your risk; your allowed risk defines your position size. First, determine the maximum acceptable loss (in money), then calculate the position size based on the distance to the stop-loss level.

Formula:

Maximum position size = (Deposit × Risk) ÷ (Distance to SL + Fees + Slippage)

Position size checklist before entering a trade

• 1. Define a fixed risk per trade (as a % of deposit)

• 2. Identify the stop-loss level (based on technical analysis or volatility)

• 3. Calculate the distance to stop-loss in monetary terms

• 4. Use the formula to calculate your maximum position size

• 5. Ensure your position size does not exceed exchange limits and fits current liquidity

 Example: Long Position Size Calculation

Input data (set by the trader):

• Deposit — 1,000 USDT

• Risk per trade (maximum) — 1%

• Trade type — Long

• Entry price — 27,000 USDT

• Stop-loss price — 26,730 USDT (example: stop-loss at −1% from entry)

• Exchange fees:

• Entry — 0.1%

• Exit — 0.1%

• Slippage — 0.5%

Step-by-step calculation of the maximum position size (long), including fees and slippage

1. Calculate the allowable loss per trade:

1. Deposit × Risk per trade = 1,000 USDT × 1% = 10 USDT

2. Determine total transaction costs (fees + slippage + stop-loss movement):

1. Fees: 0.1% + 0.1% = 0.2%

2. Slippage: 0.5%

3. Price movement to stop:

1. 27,000 − 26,730 = 270 USDT drop

2. (270 ÷ 27,000) × 100% ≈ 1%

3. Total cost: 1% + 0.2% + 0.5% = 1.7% of position size

3. Calculate the maximum position size:

1. Position size = Allowed loss ÷ Total cost

2. = 10 USDT ÷ 1.7% = 10 ÷ 0.017 ≈ 588 USDT

4. Calculate the asset quantity to buy:

1. Volume in asset units = Position size ÷ Entry price

2. = 588 USDT ÷ 27,000 ≈ 0.0218 BTC

✅ Result: The maximum allowable position size is approximately 588 USDT (≈ 0.0218 BTC) with 1% risk, including fees and slippage.

Example: Short Position Size Calculation

Input data (specified by trader):

• Deposit — 1,000 USDT

• Risk per trade — 1%

• Trade type — Short

• Entry price — 27,000 USDT

• Stop-loss price — 27,270 USDT (example: +1% stop for short)

• Exchange fees:

• Entry — 0.1%

• Exit — 0.1%

• Slippage buffer — 0.5%

Step-by-step calculation of the maximum position size (short), including fees and slippage

1. Calculate the allowable loss per trade:

1. Deposit × Risk per trade = 1,000 USDT × 1% = 10 USDT

2. Determine total transaction costs (fees + slippage + stop movement):

1. Fees: 0.1% + 0.1% = 0.2%

2. Slippage: 0.5%

3. Price movement to stop (against short position):

1. 27,270 − 27,000 = 270 USDT up

2. (270 ÷ 27,000) × 100% ≈ 1%

3. Total cost: 1% + 0.2% + 0.5% = 1.7%

3. Calculate the maximum position size:

1. Position size = Allowed loss ÷ Total cost

2. = 10 USDT ÷ 1.7% = 10 ÷ 0.017 ≈ 588 USDT

4. Calculate the volume of the asset in units (e.g., BTC):

1. Volume = Position size ÷ Entry price

2. = 588 USDT ÷ 27,000 ≈ 0.0218 BTC

Result: The maximum short position size is approximately 588 USDT (≈ 0.0218 BTC) to ensure total risk including fees and slippage does not exceed 1% of the deposit.

Why do the calculations for long and short positions look the same?

From a risk management and position sizing perspective, long and short positions are calculated in the same way. In both cases, you define the acceptable monetary risk per trade in advance, take into account commissions and slippage, and then calculate the maximum position size so that the potential loss does not exceed the specified limit.

The difference between a long and a short lies in the direction of price movement, not in the risk calculation principle. That is why it is useful to analyze both cases for educational purposes — to show that the methodology is universal and applies equally to both buys and sells.

Typical mistakes when calculating position size

1. Setting a position “by eye” without calculations

2. Ignoring risk during periods of high volatility

3. Underestimating the impact of leverage

4. Increasing position size after a series of winning trades without adjusting the allowed risk.

Even with a high level of confidence in a trade, always stick to the calculated position size. A risk management system works only when it is applied to every trade, without exceptions.

Position size calculation is especially important when using leverage — a tool that can both multiply profits and significantly increase risks.