What is position sizing? The trading minute

Don't put all your eggs in one basket. Position sizing, or calculating position size, is the question we should ask ourselves even before choosing an entry point: how much of our capital should we commit to a single trade idea? Most professional risk management frameworks recommend never risking more than 1 to 2% of total capital on a single position. A rule that seems almost too cautious until the day leverage reminds us why it exists, and this rule applies not only to crypto.

The most telling example doesn't even come from the cryptocurrency sector, but from Wall Street in March 2021. Bill Hwang, a former star manager trained at Tiger Management, was running a little-known family office, Archegos Capital.

On paper, his reported portfolio weighed about $36 billion. Behind the scenes, however, through total return swap contracts (instruments that allow for economic exposure to a stock without ever buying it or appearing on the shareholder register), Hwang had built a real exposure of around $160 billion, concentrated on a handful of media and technology stocks, according to evidence gathered by U.S. prosecutors and reported by Reuters.

The real problem wasn't even the leverage itself: it was that each prime broker bank (Credit Suisse, Nomura, Goldman Sachs, Morgan Stanley) only saw a part of the iceberg, unaware that the others were financing exactly the same concentrated bets. The SEC described, in its official statement, a system built on extreme leverage and positions hidden from counterparties. When a few stocks began to fall, margin calls cascaded, and Archegos could not respond: the fund collapsed in a matter of days, resulting in over $10 billion in cumulative losses for the lending banks, with Credit Suisse alone facing about $5.5 billion.

The parallel with a crypto trader who opens a position at 40x on their entire account is direct: in both cases, it’s not the strategy that killed the book, it’s the size relative to the actual capital, hidden until the market presented the bill.

Correct position sizing is not complicated on paper: first, you set the percentage of capital you are willing to lose on the idea if it fails, then you calculate the position size based on the distance between the entry point and the stop-loss, and finally, you adjust the leverage used so that the maximum loss remains within the envelope set at the beginning.

In the case of Archegos, as well as for an individual trader overexposed on Hyperliquid or elsewhere, an exposure sized to tolerate a loss of 1 to 2% of the account would have limited the failure to a scratch rather than a systemic collapse. This is where the risk/reward ratio makes perfect sense: there’s no point in aiming for a generous gain if the position size exposes the entire account, or multiple banks at once, to a single gust of wind.

For an individual trader, the lesson can be summed up in one simple, almost banal sentence, but one that few people actually apply, whether the account weighs 500 euros or 36 billion dollars. It’s never the trade idea that ruins an account; it’s the size you give it.

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