Risk management: the arithmetic of position size and liquidation
Risk management in trading is arithmetic tying four numbers together: the amount you are willing to lose, the distance from entry to the stop-loss, the position size, and the leverage. Fix any two and the rest follow. This article shows the calculations and what they imply; which numbers to put in is your call.
In short
- Position size = allowed loss / stop distance. Any two of those numbers fix the third — how much to take is calculated, not eyeballed.
- Leverage doesn't change the loss at your stop. It changes the room to liquidation: roughly 1 / leverage minus the maintenance margin.
- A stop beyond the liquidation price never fires: the exchange closes the position first, and the whole margin goes instead of the amount you calculated.
- Fees and funding come out of the result regardless of which way price went.
How much to take: position size is calculated from the stop
The risk of a trade is not the position size but the amount that leaves the account if price reaches the stop-loss. Once that amount and the stop are known, position size is the only unknown left, and it comes out of a division:
The formula
Quantity = allowed loss / stop distance in money
Allowed loss — the dollar amount you are willing to lose on this trade.
Stop distance — the gap between the entry price and the stop price, in the same dollars per coin.
An illustrative example
A $10,000 account, allowed loss $100, entry $2.00, stop $1.94. The stop distance is $0.06 per coin, or 3% of entry. Quantity: $100 / $0.06 ≈ 1,666.7 coins. Position size: 1,666.7 × $2.00 ≈ $3,333. Size over account is 0.33x, so no leverage is needed here at all.
Note the link between them: the closer the stop, the more coins fit into the same loss. A 1% stop with the same $100 gives a $10,000 position; a 6% stop gives $1,666. That is why the stop cannot be moved after the calculation: the loss you computed belongs to the distance you put into the formula. To run your own numbers, use the position size calculator — it also shows the notional, the effective leverage, and the risk-to-target ratio.
Losses multiply rather than add: each one is counted from an account that has already shrunk. Hence the table — how many stops in a row it takes for half the account to be gone:
The way back does not depend on the risk figure: half an account needs +100% on what is left to get back to where it started, on every row of this table. Which risk figure to use is your choice; the arithmetic only shows its price.
| Risk per trade | Losses in a row to halve the account |
|---|---|
| 1% | 69 |
| 2% | 35 |
| 5% | 14 |
| 10% | 7 |
| 20% | 4 |
Which comes first: the stop or liquidation
Leverage does not appear in the position-size formula: the loss at the stop is set by the notional and the distance, while leverage only decides how much margin the exchange demands for that notional. What leverage does set is the second number that can close the position — the liquidation price. Simplified, the distance to it is 1 / leverage minus the maintenance margin rate; at a rate of 0.5% that gives:
The formula ignores fees, funding, and maintenance margin tiers, so the exchange’s figure will differ slightly. The detail is in the article on leverage, and you can run your own numbers in the liquidation calculator.
| Leverage | Adverse move to liquidation |
|---|---|
| 5x | ≈19.5% |
| 10x | ≈9.5% |
| 20x | ≈4.5% |
| 50x | ≈1.5% |
A stop past the liquidation price is not a stop
If the stop sits further from entry than the liquidation price, it never gets there: the exchange closes the position first, and the whole margin is written off instead of the loss you calculated. An illustrative example: a stop 12% from entry at 20x, where liquidation arrives around 4.5%. The stop order simply stays in the book — the position it belonged to is already gone.The stop caps the leverage
That gives an arithmetic limit: with an 8% stop, leverage above roughly 12x puts liquidation nearer than the stop; with a 3% stop, above roughly 29x. So the order of checks is: the stop distance first, the leverage second, not the other way round.How the screener helps
The price at which a trade idea stops being valid is known before entry — and you can't sit at the terminal waiting for it. The target price screener holds up to 50 marks: a coin, a number in USDT, and the side price approaches from. It checks them against price every minute on the exchanges enabled in your account and sends a push or Telegram alert the minute price goes through that number. You can also ask to be warned ahead, by a percentage before the mark.
What holding a position costs
A trade has costs that do not depend on which way price goes. There are two of them, and both are counted on the notional, not on the margin — so with leverage they grow along with the position.
- Fees are charged twice: on the way in and on the way out. An illustrative example: a $3,333 position at a rate of 0.05% per trade is $1.67 and another $1.67, together about 3% of the $100 allowed loss. Each exchange publishes its own rates, and they depend on the order type and your turnover.
- Funding is paid or received only by futures positions, at the settlement times on the exchange’s schedule — most often every 8 hours. An illustrative example: a $3,333 position at a rate of 0.01% is $0.33 per settlement, about $1 a day, about $7 a week. The sign can flip while the position is open.
For an hour-long trade these amounts are small; for a position held a week they are comparable to the stop distance. So for long holds it makes sense to subtract the costs from the target before entry rather than discover them in a statement. How the rate works and why it changes is covered in the article on the funding rate.
Fees also change the risk-to-target arithmetic. The ratio itself is the distance to the target over the distance to the stop, and from it follows the share of targets reached at which the trades sum to zero: it equals 1 / (1 + ratio). At 1:1 that is 50%, at 1:2 about 33%, at 1:3 25%. With fees and funding the required share is higher, and the further the target, the less often price reaches it: no single number guarantees anything here.
Why one number on its own decides nothing
A risk percentage without the number of open positions
One percent per trade means one percent as long as there is one trade. Six open positions at one percent each is up to 6% at once if the stops trigger together. With correlated coins they do trigger together: three longs on altcoins that follow the market behave like one position of triple size, not like three independent ones.A stop distance without the coin’s volatility
A 1% stop looks cautious, but on a coin that travels 3% in an ordinary hour it gets knocked out by quote noise rather than by a move against the idea. A coin’s usual range and its turnover are covered in the article on liquidity — along with why an order on a thin market fills worse than the price you saw.A screener alert without your numbers
A screener answers the question of where something changed on the market, and knows nothing about your account, stop, or leverage. An alert carries no position size, no trade direction, and no probability estimate — it describes a moment. The position size and the stop stay your calculation, and they are calculated with the same formulas as above.Risk management FAQ
How do I calculate position size?
Divide the amount you are willing to lose by the distance from entry to the stop-loss in money. That gives the quantity; multiply it by the entry price for the notional. For example, $100 of allowed loss at a distance of $0.06 per coin is ≈ 1,666.7 coins and a ≈ $3,333 position at an entry of $2.00.
What percentage of the account should I risk per trade?
That is your choice rather than a rule: the only thing that can be calculated is what it implies. At 2% risk per trade an account halves after 35 stops in a row, at 10% after 7, and in both cases getting back needs a 100% gain on what is left.
Does leverage change the risk of a trade?
Not the loss at the stop: that is set by the notional and the stop distance. Leverage decides how much margin the notional needs and how far away the liquidation price lands: roughly 1 / leverage minus the maintenance margin, so about 9.5% at 10x and about 1.5% at 50x.
Can a stop-loss sit beyond the liquidation price?
You can place the order, but it will never fill: the exchange closes the position at the liquidation price first, and the whole margin goes instead of the loss you calculated. Compare both numbers before entry.
What does holding a futures position cost?
Two items, both counted on the notional: fees, charged twice on the way in and out, and funding, charged at settlement times on the exchange schedule — most often every 8 hours. An illustrative example: a $3,333 position at a funding rate of 0.01% costs about $1 a day.
Does risk management protect me from losses?
No. It does not make trades profitable and does not predict price — it sets how large the loss will be when a trade fails, and how many such trades the account can take.
More on this: leverage and the liquidation price — where the distances in the table above come from; filtering out false hits — how to set thresholds so there are fewer alerts; and reading the alert breakdown — what a screener does and does not tell you about a moment.
Read next
How to cut false screener hits and noise
Noise in screener alerts: liquidity floors in millions of dollars, the interval, a per-coin cap and pause, the wash-volume filter and its limits.
How to read an alert breakdown
The four lines under an alert: the 1h RSI and the daily SMA200, the share of coins that moved the same way, the Upbit premium, and a nearby announcement.
Open interest screener scenarios
Four ways to read open interest: which thresholds and intervals to set in the screener, what the alert says, and where each scenario breaks.
