Definition
Position sizing is a trading and investment concept that defines the amount of capital allocated to a single trade or asset. It translates a trader’s risk and return preferences into a specific quantity of tokens, contracts, or units to buy or sell. In crypto markets, position sizing helps structure exposure to volatile assets in a way that aligns with an overall portfolio plan.
The concept is closely tied to a trader’s risk profile, since different risk tolerances imply different acceptable position sizes for the same trade idea. It also interacts with leverage, because borrowed exposure changes the effective size and sensitivity of a position relative to the capital committed. As a result, position sizing acts as a core parameter in risk management across both spot and derivatives trading.
Context and Usage
In practice, position sizing is treated as a structural characteristic of a trading strategy rather than an ad hoc choice for each trade. It defines how much of a portfolio is placed at stake when entering a new position, and therefore how much impact any single outcome can have on total equity. Consistent position sizing helps keep trading behavior aligned with predefined risk limits and performance expectations.
Within a broader framework, position sizing is used to keep individual trades proportionate to account size, volatility, and the trader’s risk profile. When leverage is available, position sizing determines the notional exposure created from a given amount of margin, shaping both potential gains and losses. In this way, position sizing serves as a bridge between abstract risk preferences and the concrete scale of positions in the market.