Position size is defined as the number of units of a trading instrument that are bought or sold.
Position size is a vital part of a trading strategy, since it is directly related to one’s potential profit or loss. A larger position size will generate a higher profit or loss as compared to a smaller position size for a given price move. Sizing a position also plays an important role in risk management as knowing when to execute larger or smaller trades, and when to increase or reduce the size of a position impacts profitability.
Reducing position size may be a good idea when one is in a profitable position and if there’s an imminent risk of the price moving against you. Alternatively, it may be beneficial to increase size when the risk to your position is very low and you want to capitalize on the market’s momentum during a sudden move.
Having a better understanding of position size is particularly important as new traders often oversize their positions in the market in the hopes of making big bucks. But in the process, they expose themselves to a lot of risk and can end up losing a lot of their capital. Therefore, traders should take a methodical approach to position sizing, based on the value of their account, the risk per trade and an invalidation point (which is a price at which the trade idea is considered invalid).
Suppose you have an account value of $10,000 and you’re willing to risk 3% (i.e. $300). Let’s say you’re looking to long ETH at $3,000, then the bullish idea is invalidated once the price goes below $2,700, since the risk you’re willing to take is equivalent to a $300 loss. Therefore, position size should be around 1 ETH.