If stop-loss hits: You lose exactly $200 (2% of account)
Why 1-2%?
Survival math:
At 2% risk per trade, you can survive 50 consecutive losses before your account is down 63%
At 5% risk per trade, you're down 92% after 50 losses (nearly impossible to recover)
At 10% risk per trade, you're down 99.5% after 50 losses (account blown)
Real world: Even great traders have 8-10 losing streaks. At 2% risk, you're down 16-20% (recoverable). At 10% risk, you're down 57% (psychological damage, margin calls).
Position Sizing Calculator (Step-by-Step)
Step 1: Define your risk
Account: $10,000
Risk: 2% = $200
Step 2: Identify entry and stop-loss
Entry: $50,000 BTC
Stop-loss: $48,500 (support level)
Distance to stop: $50,000 - $48,500 = $1,500
Step 3: Calculate position size
Position size = $200 / $1,500 = 0.133 BTC
Dollar value: 0.133 × $50,000 = $6,650
Step 4: Verify
If stop hits: 0.133 BTC × $1,500 loss = $200 ✅
This is exactly 2% of your $10,000 account
Adjusting for Volatility
Problem: A 2% stop on Bitcoin might be $1,000, but on a volatile altcoin it might be $5 (coin is $100, needs 5% stop due to volatility).
Solution: Use ATR (Average True Range) for dynamic stops
ATR-based position sizing:
Measure ATR (14-period average volatility) → e.g., $2,000 for BTC
Set stop at 1.5× ATR → $3,000 below entry
Calculate position size: $200 / $3,000 = 0.067 BTC
Result: Your stop is wide enough to avoid normal volatility, but you're still risking only 2%.
Fixed Percentage vs Kelly Criterion
Fixed Percentage (Conservative)
Method: Risk the same % every trade (e.g., 2%)
Pros:
✅ Simple to calculate
✅ Conservative (protects against losing streaks)
✅ Compounding (risk grows with account)
Cons:
❌ Slower growth than optimal
❌ Doesn't account for win rate or reward-to-risk
Kelly Criterion (Aggressive)
Method: Risk a % based on your edge (win rate × reward-to-risk)
Problem: Full Kelly is too aggressive (40% risk per trade = fast blowup)
Solution: Half Kelly or Quarter Kelly
Full Kelly: 40% (insane)
Half Kelly: 20% (still risky)
Quarter Kelly: 10% (more reasonable, but still aggressive)
Which Should You Use?
Beginner/Intermediate traders:
Use fixed 1-2% (simple, safe, proven)
Focus on strategy and psychology first
Advanced traders:
Use Quarter Kelly IF you have 100+ trades of data (know your win rate, avg win/loss)
Even pros rarely go above 5% per trade
Key insight: Kelly assumes perfect knowledge of your edge. Most retail traders overestimate their win rate (think they have 60%, actually have 45%) → Kelly blows them up.
Portfolio Diversification: Beyond Bitcoin
Why Diversify?
Goal: Reduce portfolio volatility by holding uncorrelated assets.
Example:
100% Bitcoin: If BTC drops 30%, your portfolio drops 30%
50% Bitcoin, 50% Stablecoins: If BTC drops 30%, your portfolio drops 15%
Trade-off: Diversification reduces risk, but also reduces upside (stablecoins don't pump).
The Correlation Problem
Correlation = how closely two assets move together
Correlation = 1.0: Assets move perfectly together (100% correlated)
Correlation = 0.0: Assets move independently (no correlation)
Correlation = -1.0: Assets move in opposite directions (negative correlation)
Crypto reality:
Bitcoin vs Ethereum: 0.85-0.95 correlation (move together 85-95% of the time)
Bitcoin vs most altcoins: 0.70-0.90 correlation
Bitcoin vs stablecoins: 0.0 correlation (stablecoins don't move)
Bitcoin vs stocks: 0.30-0.50 correlation (somewhat independent)
Key insight: Holding 5 altcoins is NOT diversification - they all crash when Bitcoin crashes.
