Risk & Position Sizing
The arithmetic behind position size, liquidation price, drawdown recovery and the limits worth enforcing in code.
60 guides
- Annualized funding cost: what a funding rate means per year
The same per-settlement funding rate costs very different amounts per year at different settlement intervals. How to annualise it, compare quotes, and read it against margin.
- Averaging down vs dollar-cost averaging
Nearly identical arithmetic, opposite origins. One is a schedule decided in advance, the other a decision made under pressure — and that difference is everything.
- How to calculate break-even price after averaging down
Work out your weighted average entry and true break-even price after adding to a position, with entry and exit fees included, for both longs and shorts.
- Compounding reality check for monthly return claims
What a claimed monthly return implies once it compounds, why volatility drag pulls the real figure lower, and how to use that arithmetic to filter trading claims.
- Correlation and position limits
Three positions sized at 1% each are not three 1% risks if they move together. Per-trade sizing cannot see this, which is why a separate cap is needed.
- DCA average cost formula, with a worked example
The formula for your average cost when buying a fixed amount on a schedule, why it comes out as a harmonic mean, and how to compute it with fees in a spreadsheet.
- Designing a daily loss limit
Picking the number is the easy part. The design questions are what counts toward it, what happens when it trips, and why closing orders must be exempt.
- Drawdown recovery table: the gain needed to recover a loss
How much you need to gain to recover a 10%, 30% or 50% loss. The formula, a full lookup table from 1% to 95%, the reverse lookup, and why it argues for a daily loss limit.
- Reading an equity curve honestly
The shape tells you about variance and sequence, which the headline return hides. What to look at, and the three ways a curve flatters a strategy.
- Fee drag: what trading fees cost you over a year
Annual fee drag is round-trip rate × notional multiple × trade count. How to compute it, why turnover and size multiply it, and how to model it as a negative return.
- Expectancy vs win rate
Win rate alone says nothing about whether a strategy makes money. Expectancy combines it with payoff, and the two move against each other by construction.
- How leverage changes your distance to liquidation
Distance to liquidation is roughly 1/leverage minus the maintenance rate, so each step up in leverage removes a fraction of the room left. A 2× to 100× table, worked by hand.
- How liquidation price is calculated, with worked examples
The isolated-margin liquidation formula for linear perpetuals, derived line by line, with a long and a short worked by hand and a list of what venue calculations add.
- How to calculate funding payments on a perpetual position
Funding payment = position notional × funding rate, per settlement. A step-by-step method, a worked ledger, the sign convention, and how to check it against your venue.
- How to calculate futures PnL by hand, including fees
The formula for long and short futures PnL, worked examples to follow on paper, where fees and ROE come in, and why your number can disagree with the exchange.
- How to choose a stop-loss level
A stop belongs where the idea is wrong, not where the loss feels acceptable. The difference decides whether the number means anything at all.
- How to calculate position size from your stop-loss
The three-line formula for sizing a trade from its stop, a worked example you can check by hand, the conversion to contracts, and the mistakes that double real risk.
- Inverse vs linear contracts: coin-margined vs USD-margined futures
How coin-margined (inverse) and stablecoin-margined (linear) futures compute PnL, why inverse PnL is non-linear in coin terms, and how the collateral changes your real exposure.
- Isolated vs cross margin
Cross margin moves liquidation further away and couples every position to every other. Isolated caps the loss per position and liquidates sooner. Which risk you prefer.
- Liquidation cascades
Forced selling begets forced selling. Why leveraged markets move further than the news justifies, and what it means for stop placement and sizing.
- Losing streak probability
How likely a run of consecutive losses is, what it does to an account at a given risk per trade, and why a cooldown rule is arithmetic rather than sentiment.
- Maker vs taker fees
Takers pay more, but the cheaper option has a hidden cost — the fills you miss are not randomly selected. When each is actually the better choice.
- Session times and why 24/7 is not uniform
Crypto never closes but it does go quiet. The same strategy run at the wrong hours pays more and fills worse, for reasons unrelated to the signal.
- Maximum leverage for your stop distance: formula and table
Estimate the isolated leverage where stop and liquidation distances coincide. Read the formula, illustrative table and limits without assuming a guaranteed stop exit.
- What risk/reward do you need for your win rate? (break-even table)
A lookup table of the minimum risk/reward ratio to break even at each win rate from 20% to 70%, the formula behind it, and a second table showing how fees raise the bar.
- What partial exits do to your expectancy
Taking half off at 1R feels like risk management. It caps the winners while leaving losers at full size, and the arithmetic is not obviously favourable.
- Perpetuals vs dated futures
One never expires and pays funding to stay near spot. The other expires and converges by contract. The difference decides how holding cost behaves.
- How to calculate position size including fees
Fees are charged on notional, so a stop-out costs more than the stop distance. How to fold entry and exit fees, slippage and funding into position size, worked by hand.
- Position sizing methods compared
Fixed fractional, fixed dollar, fixed quantity and volatility-adjusted. Each makes a different implicit bet about what stays constant across trades.
- Risk of ruin
The probability of losing enough capital to stop trading. What the formula assumes, why the assumptions fail, and the more useful question to ask instead.
- Risk per trade vs risk per day
A 1% per-trade rule says nothing about what a day can cost. The two limits control different things and you need both.
- Risk/reward ratio mistakes that make a 3R trade something else
Six ways a planned risk/reward ratio ends up wrong — notation, target fitting, entry fills, fees, liquidation and moved stops — with the arithmetic for each.
- How many trades before you can judge a strategy
Twenty trades tells you nothing, and high-R strategies need far more than low-R ones. Why, and what to look at while the sample is still too small.
- Scaling in vs entering all at once
A planned ladder and a rescue look identical in the arithmetic. The difference is whether the full size was decided before the first entry.
- Sequence of returns risk
The same set of returns in a different order produces a different ending balance once money is being added or withdrawn. Averages hide this entirely.
- Slippage and market impact
The gap between the price you expected and the one you got. Why it is worst on stop-outs, scales with size, and quietly lowers every R multiple you record.
- Spread, depth and what liquidity actually costs you
The quoted spread is the visible part of a cost that grows with your size. What to check before assuming a market can absorb your position.
- What to record in a trading journal
Most journals record outcomes, which is the least useful column. The fields that make a review answer questions, including the ones usually missing.
- Unrealized vs realized PnL: what each number means
Unrealized PnL is what an open position would make if closed now; realized PnL is what closing booked. How each is computed, partial closes included, and where it misleads.
- Volatility and stop distance
A 2% stop is generous on one instrument and inside the noise on another. Sizing stops from volatility makes the same rule mean the same thing everywhere.
- What a trailing stop actually costs
It locks in gains automatically and cuts your average win. Whether that helps depends on how your winners behave, which you can measure.
- What is auto-deleveraging (ADL)? Who gets closed, and at what price
ADL force-closes profitable positions when a bankrupt one cannot be covered. Each venue's trigger and ranking formula, the close price, and how a bot should handle it.
- What is basis in futures trading? Spot vs futures, annualised
Basis is the gap between a futures price and spot. How to compute and annualise it, why it converges at expiry, how it behaves on perpetuals, and what basis risk does to a hedge.
- What is hedge mode? One-way vs hedge mode on Binance, Bybit and OKX
Hedge mode lets you hold a long and a short in one contract at once. How Binance, Bybit and OKX implement it, and the order errors a mode mismatch produces in trading code.
- What is a funding rate? How perpetual funding is actually built
The funding rate is a premium plus a clamped interest term, capped and scaled to an interval. How Binance, Bybit, OKX and Hyperliquid differ, and what your code must read live.
- What is initial margin? How it is set and what it locks up
Initial margin is the collateral a venue locks when you open a leveraged position. How it is computed, why it is not your maximum loss, and how adding margin moves liquidation.
- What is an insurance fund in crypto futures, and what does it cover?
An insurance fund absorbs losses when a liquidation fills past the bankruptcy price. How Binance, Bybit and OKX run one, what Hyperliquid uses, and what it does not protect.
- What is leverage in trading? The three numbers called leverage
Leverage is exposure divided by the capital behind it. The three different figures that share the name, how each is computed, and why account leverage rises as you lose.
- What is maintenance margin?
The minimum equity a position must keep to stay open. It is tiered by size, which is why a bigger position liquidates earlier at the same leverage.
- What is mark price? Why venues liquidate on it, not the last trade
Mark price, not the last trade, decides liquidation and unrealised PnL. How Binance, Bybit, OKX and Hyperliquid build it, and why it drifts from the chart in fast markets.
- What is market depth? Reading the order book before you size
Market depth is the size resting at each price in the order book. How to price a fill for your order size, measure depth in a band, and why displayed depth overstates it.
- What is notional value? The position size fees are charged on
Notional value is the full market value of a position, not the margin behind it. How to compute it for linear, multiplier and inverse contracts, and why fees and funding use it.
- What open interest tells you
Volume counts trades; open interest counts positions still held. The difference between the two is what makes a move informative or not.
- What is an R multiple?
R is one unit of risk — the distance from entry to stop. Measuring results in R instead of currency makes trades comparable and separates sizing from selection.
- What is volatility drag? Why average returns overstate growth
Volatility drag is the gap between the average return and the compounded one, about variance ÷ 2 per period. How to compute it, why leverage squares it, and what to report.
- Why full Kelly is too aggressive for trading
Full Kelly assumes you know your edge exactly. You estimated it from a small sample, and the growth curve punishes overestimates far harder than underestimates.
- Leverage is not the same as planned trade risk
Separate planned stop-loss exposure from isolated leverage and liquidation risk. A stop-distance calculation is not a guaranteed loss cap or safe leverage level.
- Why your liquidation price changes after you open a position
Funding, fees, margin changes, adding to a position, tier changes and cross-margin PnL each move liquidation. A worked example of every one, and what does not move it.
- Why tight stops can cost more
Halving the stop distance doubles the position for the same risk — and doubles how often noise takes you out. The trade is size for frequency, and it is rarely priced.
- Why position sizes drift upward
Nobody decides to oversize. It happens through six mechanisms that each look reasonable, and only one of them is about greed.