Position Sizing in Crypto: The Formula That Protects Your Capital

Position sizing determines how much of your portfolio to put in any single trade. Getting this right is the difference between staying in the game and blowing up.

Position sizing is the mathematical answer to "how much should I invest in this trade?" Most beginners use intuition: "this looks really good, I'll put in 30%." This is wrong. Consistent position sizing based on defined risk is how professional traders survive long enough to profit from their edge.

The Kelly Criterion Simplified

The Kelly Criterion is the mathematically optimal position sizing formula: (Win probability × Win/loss ratio - Loss probability) / Win/loss ratio. For a strategy with 55% win rate and 2:1 reward/risk: (0.55 × 2 - 0.45) / 2 = 32.5%. But full Kelly is too aggressive — most professionals use half-Kelly or quarter-Kelly (8-16% here) to reduce variance and drawdown.

Simple Fixed-Percentage Approach

• Decide maximum risk per trade: 1% for beginners, 0.5% for more conservative or larger accounts
• Calculate stop-loss distance: how far is your stop from entry as a percentage?
• Divide risk % by stop distance: this gives position size as % of portfolio
• Example: 1% risk, 5% stop distance = 20% position size in that trade
• Advantage: simple, consistent, no ego — your conviction level doesn't change the math

Portfolio Level Limits

• Maximum single-asset exposure: 20-30% of total portfolio regardless of conviction
• Maximum correlated exposure: don't exceed 40% in assets that move together (BTC, ETH, SOL)
• Maximum open risk: total risk across all open positions should not exceed 5% of portfolio
• Cash allocation: keep at least 20-30% in USDC or stable assets as dry powder for opportunities