 Nearly every day I see traders struggling to understand how to calculate their position sizes and generally just make sense of leverage trading. It can definitely be very confusing at first. So in today's video, I'll break down the concepts and give you a very simple way to calculate position size as well as understanding how to use leverage. Let's start right in. Hey, what's up Jay here and welcome to Bitcoin Daily bringing you guys the best tips, tutorials and ideas to help you guys learn how to become profitable and successful traders. If you're new here, the goal of this channel is to empower you guys with the resources and knowledge to get you to that next level. So make sure to subscribe, like and share this video also turn on that notification bell so you're notified as soon as we post these videos five times a week. So let's jump right in guys. Today we're going to be talking about how to calculate your position size. We're going to start with the terms. Then we're going to show you a very, very simple formula which you can use to always be able to calculate your position size depending on where you're placing your stop loss. And then of course we're going to talk about leverage. We're going to get into using leverage, how much leverage you know you should be using and how your position size relates to your leverage. So let's dive right in. So let's define our terms. Entry simply means the price at which your order to buy or sell is executed. Your capital is your account balance. Your position size is a number of contracts or units of an instrument you buy or sell. Stop loss simply means the order to close a losing position to prevent further losses. Risk amount means capital you lose on the trade if your stop loss gets triggered. Leverage means borrowing capital from your broker to open bigger positions than you would otherwise be able to. And finally liquidation means the forcible closure of your position. So let's talk about position size and risk amount. Position size and risk amount are not the same. This is crucially important to understand otherwise nothing else will make any sense whatsoever. If my capital is $1,000 and I am risking 2% per trade it means if my stop loss gets triggered my losses will be limited to $20. The example here will be simple. $1,000 times $0.02 equals $20. In other words I will lose $20 if my stop loss is triggered. It does not mean that my position size is $20. You guys gotta wrap your heads around that right there. It's very important. So in order to calculate your position size you need to know your risk amount, entry, and stop loss. The simplest formula I use is as follows. Position size is your risk amount divided by distance to stop loss. So let's go over an example. I am trading ETH USD on Bybit and I want to calculate my position size. I want to long. So my starting capital is $1,000. My risk amount is 3%. So to figure that out $1,000 times $0.03 equals $30. $30 is 3% of $1,000. Now the entry I'm going to be using is $1,350 and my stop loss is going to be $1,325. In order to calculate the distance to stop loss part of the equation I simply use the trading view measuring tool and then convert the percentage into a decimal. So you open trading view you go to the left hand side and select your price range. So once you have price range selected you're going to click where it is that you want to measure. So I'm going to measure from $1,350 down to $1,325. It's not going to be perfect but that's going to be the order. So I've placed my measuring tool here so I could get my exact numbers. If you want to really go into the configurations of this and place your exact numbers you can just open it up and place your exact entry. So in this instance I'm going to be using $1,350, $75 as my entry and $1,325 as my stop. As you guys can see here that's minus $25.75 and my stop is minus 1.91%. So the important number here is 1.91%. Now to convert a percentage into decimal form you simply divide the percentage by 100 or just move the decimal point two figures to the left. So in this example we had 1.91 and then we're going to divide it by 100 equals 0.019. So all you have to do is move your decimal point two times to the left. So now let's calculate the position size based on the numbers that we have, right? So you remember the formula for position size it's risk amount divided by distance to stop. So our position size is 1,000 and we're taking 3% risk so 1,000 times 3 divided by 0.0191 and that gives us 1,570. So now I know that 1,570 contracts is going to be my position size based on this trade, based on my entry and my stop loss. If we do this real quick on the calculator you take your capital times really could just do 3% equals 30, right? Now you divide that by 0.0191 equals 1,570. I just take out whatever is at the end, round it up to the nearest whole number usually. So 1570 is how many contracts you're going to be opening up and that's how many contracts you're going to be risking. And then if you want to back test this to make sure that you're calculating this correctly, then you just simply take your 1,570 and you multiply it by 0.0191 equals 30 and that's 30 dollars is what you're risking. That's your risk amount. So if the price reaches your stop loss you're going to lose 30 dollars which is 3% of your capital as you see the math checks out. The expression of having a tight stop should now make a lot more sense. The closer your stop is to your entry the bigger position size you can trade while keeping your risk amount the same. It sounds counterintuitive so let's take a look at the numbers. Suppose we have two traders, Tiff and Will trading ETHUSDs on Bybit. They have the same capital risk amount and entry. The only difference is in their stop loss placement. So first let's take a look at trader one, Tight Stop Tiff. Her capital is $5,000. Her risk amount is 3%. So 3% of $5,000 is $5,000 times 0.03 equals $150. Our entry is $1,350. Our stop loss is $1,325. So distance to stop loss if you use the tool like we showed you before you will see right here that the distance to our stop loss is 1.91% or $25.75. So let's go back to our calculator and calculate the position size. Remember her risk was $150 and then we're going to divide that by our distance to our stop loss which is 0.0191 and that's going to equal 7,853 contracts right or units or whatever they call it on your platform. So now let's look at our second trader, Wide Stop Will. Wide Stop Will has the same amount of capital, $5,000 using the same amount of risk, 3%, which is $150 and he's using the same entry which is $1,350. Now the difference here is the stop loss. Wide Stop Will has higher risk tolerance and wants to kind of give the price more space to go up and down right. So he's going to use a stop loss at $1,250. So what's our distance to our stop loss? That's when we jump into Trading View and figure those numbers out. Alright so we came back to our tool on Trading View and input the two entries and we changed the stop right. So we hit OK and now we see that our stop loss is 7.46% away from our entry. So now again let's go ahead and do the math. So it's the same exact risk right, $150 but what is it that's changing now? The only thing changing here is the distance to stop loss right. So we're doing 150 which is the risk, the 3% risk divided by, now instead of putting 0.0191 we're going to put what we have here which is 0.0746 right. So divided by 0.0746 equals, just forget whatever says there, just round it up to 2010 and that is our answer. The amount of contracts that Wide Stop Will will be opening up is 2010 contracts. So as you see there is a balancing act right. Tighter stop loss gives you bigger position size but you also have less breathing room. A wider stop loss gives you smaller position size but you have more breathing room. Stop loss placement should never be random, it should always be calculated. We will do a tutorial on stop loss placements in the near future. Alright guys hopefully you're enjoying this video so far and you're getting value out of this content. If you're enjoying this video go ahead and hit that subscribe button, hit that like button and share this video. Don't forget to turn on the notification bell as well. Next we're going to continue to talk about how to use leverage with your position size and then we're going to end it with a checklist that you should always always look at and check off before entering any single trade. So if you're going to take one thing away from this video it should be that leverage does not change the position size calculation. Let me say that one more time and put it really big on the screen. Leverage does not change position size calculation. Instead leverage serves two primary purposes. It reduces your counterparty risk by allowing you to trade larger position size without having all of your capital with your broker and it allows you to trade with a position size greater than your capital when so required. Consider the following example of someone trading ETHUSD on Bybit. Their capital is $10,000 their risk amount 4% so 4% of $10,000 it's $400 quick math guys. So we're going to be using the same exact entries 1350 entry 1325 stop loss. So we've already calculated this stop loss the distance to stop loss is 1.91% right? So let's use our position size calculation formula which is risk amount divided by distance to stop loss. So now our risk is 400 divided by 0.0191 equals 20,942 contracts wait 20,942 contracts but the trader's capital is only 10,000 how's that possible? Simple. Leverage. Leverage allows the trader to open that position which is greater than his capital using borrowed funds from the broker. I reiterate the fact that the position size in the example will be 20,942 contracts and it will remain unaffected by leverage. That number is fixed. Opting for higher leverage simply means that the trader wants to put up a smaller amount of capital to open that same position size. Opting for lower leverage simply means that the trader wants to put up a greater amount of capital to open up that same position size of 20,942. Moving the leverage slider will not change the number of contracts which is your position size it will simply affect how much of your capital you use to open that same position size. However this does not mean that you can use maximum leverage simply because your position size is unaffected. You need to ensure that your stop loss kicks in before your liquidation. Using a liquidation price calculator or you can see it in your confirmation page before you place an order on Bybit but using that you can calculate your liquidation before opening a position. This will allow you to ensure that your stop loss always comes first. Leverage normally comes in two flavors isolated margin and cross margin. Isolated margin liquidation liability is limited to the original margin posted. For example broker will not use your remaining capital to keep the position open. You can also increase or decrease your leverage on the go. This is usually the preferred method for traders taking one off speculative directional trades and this is also what I recommend the majority of traders to use. Cross margin the broker can use all of your capital to avoid liquidation but liquidation means your total capital goes to zero. This is usually the preferred method for traders with multiple concurrent positions. I do not recommend using cross margin especially if you're new to leverage trading or just new to trading period. So let's put it all together. How does leverage affect the position size calculation? The short answer is that it doesn't as long as your market stop loss is triggered before your liquidation. The next logical question is how do I know what my liquidation price is before I have open day position? The answer is that Bybit and most other exchanges as well provides you with a liquidation price prior to you confirming the order. There's also liquidation price calculators which you can google and find very easily. It is imperative that you ensure that your market stop loss kicks in before you get liquidated. Your position size is far more important than the leverage you employ. That is why it's pointless to ask what leverage is safe or what leverage some other trader is using because you have no idea of their other risk related perimeters. The information is incomplete and therefore largely useless. If I am long 10,000 contracts at times two leverage that does not mean that I am longing 20,000 contracts. The only way you can make more is by risking more. So for example larger position sizes being key not ramping up the leverage. The simplest way to put it position size is the most important thing and leverage simply allows one your position size to be greater than your capital when so required and two trade your usual size without keeping all of your capital with your broker. So let's go over the trading checklist that you should check off before entering in any trade. Here is exactly how I apply all of this when entering a trade. I will supply some fictitious answers so that the format makes sense. Assume that this is for a long position on ETHUSD on Bybit. So what is my capital? $1,000. What percentage of my capital do I want to risk? 3%. What therefore is my risk amount? $1,000 times $0.03 equals $30. What is my entry? $1,350.75. What is my stop loss? $1,325. What is the distance to my stop loss from my entry? 1.91%. What is my position size? Position size formula is risk amount divided by distance to stop. So that's 30 divided by .0191 is 1,570 contracts. Using the Bybit confirmation page, will my market stop loss trigger before my liquidation? The answer must always be yes. In conclusion, here are some points that are hopefully clear. Position size is not the same as risk amount, but it is derived from your risk. You only need to know your risk amount, entry, and stop loss to calculate your position size. The position size formula is risk amount divided by distance to stop loss. The closer your stop loss to your entry, the bigger your position size, and the inverse is true also. Leverage does not affect your position size and leverage does not alter the position size calculation equation. The only way to make more money is by trading bigger position sizes and added risk that comes with doing so. Not by moving a leverage slider. Know the liquidation price prior to opening a position to ensure that the stop loss kicks in before you get liquidated. Asking, caring about what leverage other traders use is pointless without knowing more information. Leverage is mostly used as a marketing gimmick. Alrighty guys, thank you so much for watching this video. I hope you guys received the value that I intended for you guys to receive. Out of this, I get questions about position sizing all the time. I see people using the wrong position sizes all the time. I see people over leveraged all the time, which makes you an emotional trader. You don't want to be an emotional trader because then you don't think with logic and you make bad decisions. That always leads to bad decisions. So guys, appreciate you guys. Make sure to subscribe and like this video. Drop a comment. Let me know what you think. And if you have any questions about this video and about position sizing, that's basically it guys. I will see you on the next one. As always, peace and love.