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November 28, 2023

Cryptocurrency Trading: How to Calculate Lot Sizes and P&L?

The Need for Calculating Lots Sizes to Boost One’s P&L (Profit & Loss)

As always, traders trade because they want a side income or for most of them, they do it full-time, hence their bread and butter. And like most traders, you would like to increase your profits and reduce your risks. One way to do this is via position sizing. 

Position sizing means being aware of lot sizes to make sure you are not over-risking your capital in your margin account since an oversized and disproportionate lot size on one or a few trades can wipe out your account should the market turn against you.

Understanding the suitable position size and leverage to use can increase your longevity in the game and is based on the size of a trader’s account, the risk of his equity per a single trade, the distance between our opening position and stop-loss, and the number of lots (contracts, pips, units) allocated to our position.

What is Position Sizing?

When a trader knows how to calculate the appropriate amount of position size in his trading account, it increases his discipline and he can better manage his risk.

It is tempting to use huge amounts of leverage on crypto platforms as a new trader when one is using directional approaches in their strategy, but this is because most newbie traders only think of their upside. Hence, position sizing can put risk into perspective and traders can better measure their RR (risk-rewards) ratio with this added tool in their arsenal.

Position sizing can help smoothen price swings when a market goes awry and one has to know how much risk one can take in terms of units like lots, dollars, pips or contracts. This will determine stop and take-profit levels while taking last week’s subject, liquidation levels into consideration.

Critical Aspects of Position Sizing

A trader first needs to choose their account risk before determining their position size. 

This refers to the size of equity one is willing to risk on a single trade.

A general rule of thumb would be 1-2% for professional traders. With some intermediate traders going up to 5%. 

This means one would never have a “blow-out” day and can recoup losses quickly if all they risk at any one time on a couple of positions is a maximum of 5% of their total margin (i.e., $500 out of $50,000).

It very much depends on the kind of trader one is. 1% would be sufficient for scalper and active traders while long term swing and positional traders can go with 2%.

Take a few more pairs into mind and we can thus set a cut-off at 5%.

Stop-losses will depend on whether the trade is using leverage or not, and the further away the stop-loss from the entry price, the smaller the position size and vice versa.

That way we can go for more distance with less meat, while keeping the risk management to an average of 1-5%.

Formula For Position Sizing

A simple formula would be:

【(Account Size * Risk (%) / (Entry Price - Stop Loss) 】* Entry Price

Hence if the pair is BTC/USDV long on our Universe exchange, this would be:

【($10,000 *2%) / ($35,000 - $33,000)】* $37,000 = $3,700

Therefore divide $3,700 by the BTC price of $35,000 and you get 0.1057 units

Which is 0.1057 units of BTC.


Keep in mind that the above explanation is just a general rule of thumb and as markets can be volatile and every trader’s approach, strategy and timeframe is different, one can tailor his own position sizing, stop-loss and risk management to his unique style of trading. Then keep to one that works in line with your strategy, backtest it regularly until you have a consistent win-rate and P&L. 

Author: Sean Lai, Velo's BDM