"Position" is a common term in financial trading, and it has different meanings in different contexts. In the futures contract trading market, a position specifically refers to the quantity of futures contracts bought or sold. For buyers going long, it is called holding a long position, and for sellers going short, it is called holding a short position. Before calculating the position size, we need to have a basic understanding of the concepts of long and short positions.
Holding a long position refers to a situation where a trader believes that the market is likely to rise in the future. Consequently, they go long, purchasing a position (a specific quantity of futures contracts) known as a long position. After buying at a certain price, traders wait for the price to rise to their target level before selling the position to make a profit.
Holding a short position, on the other hand, occurs when a trader believes that the market is likely to fall in the future. In this case, they go short, selling a position (a specific quantity of futures contracts) known as a short position. After selling at a certain price, traders wait for the price to decrease to their desired target before buying back the position to realize a profit.
Risk management involves preparing for the possibility of failure in any trade. For example, after holding a long position, if the market suddenly takes a downturn, you need to set an exit price. Exiting at this predetermined price, even if it means accepting a loss, defines the amount of money you are willing to risk – this is referred to as the risk amount. Incurring losses up to this risk amount is essential as it minimizes the risk, preventing your account from sustaining losses beyond what you can afford.
The setting of the exit price depends on individual trading principles and strategies, which can vary from person to person. It revolves around your trading methods and understanding of when the market has made a significant turn, prompting you to exit to cut your losses. It is crucial to note that the difference between the exit price and the entry price, as well as the absolute ratio between entry prices, are known as the stop-loss level.
Although trading methods differ among individuals, most traders set their risk levels between 0.5% to 2% of their account balance. This means that the risk amount for each trade is set between 0.5% to 2% of the total capital. By doing so, even in case of losses, there is a chance for recovery or subsequent profits.
In traditional financial trading markets, the 1% investment principle is commonly adopted, allowing a maximum risk of 1% for each trade. For instance, if your account size is $10,000, you can afford a risk amount of $100 per trade.
The formula for calculating position size is as follows: Position Size = Risk Amount / Stop-Loss Level,
where Risk Amount = Position Size * Risk Level, and Stop-Loss Level = |(Entry Price - Exit Price)| / Entry Price.
Let's assume we have $10,000 in our account, and the risk level is 1%. So, the risk amount is $100.
Suppose we want to short Bitcoin at $26,000, setting our stop-loss exit price at $27,000, which represents a stop-loss level of 3.8%. In this scenario, the position size would be $100 / 0.038 = $2,631.
Similarly, if we were to go long at $26,000 with a stop-loss exit price at $25,000, also at a 3.8% stop-loss level, the position size would still be $2,631.
Therefore, our position size should be set at $2,631. If the price of Bitcoin reaches our short stop-loss price of $27,000 or our long stop-loss price of $25,000, we would incur a loss of $100.
Disclaimer: Cryptocurrency trading involves risk. This information does not provide advice on investment, taxation, legal, financial, accounting, or any other related services, nor does it constitute advice to purchase, sell, or hold any assets. MEXC Learn provides information for reference purposes only and does not constitute investment advice. Please ensure you fully understand the risks involved and exercise caution when investing. The platform is not responsible for users' investment decisions.
