Understanding Crypto · Lesson 15 · Advanced
Liquidation and Position Sizing
You derive position size from the stop distance instead of from leverage and know your liquidation price before every trade.
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Liquidation price
Simplified (isolated): a long liquidates at entry times (1 minus 1 over leverage). At 10x and an entry of 100,000 the liquidation sits at roughly 90,000. It is triggered by the mark price, not the last price of a single exchange.
The stop determines the size
The position-sizing formula (Kovner: position size is determined by the stop) is derived in the lessons Position Sizing (grundlagen position-sizing-formel and risikomanagement der-stop-und-ein-prozent-regel). The crypto-specific point: Goodman recommends only 0.5 to 1 percent risk here, because in a crash almost all cryptos fall together and your diversification then vanishes.
Play with leverage and see how close the liquidation moves.
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Test yourself
10x long, entry 100,000. Where is the liquidation price roughly (isolated)?
- Around 90,000
- Around 50,000
What do you derive position size from?
- From the stop distance and the risk percentage
- From the exchange's maximum leverage
Which price triggers the liquidation?
- The mark price
- The last price of the cheapest exchange
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The key points at a glance
- Liquidation price long: entry times (1 minus 1 over leverage), at 10x roughly 10 percent below entry.
- Leverage does not change position size, only the stop distance counts.
- A 50 percent loss needs a 100 percent gain to recover, survival before performance.
Deep dive
How to calculate your liquidation price before the trade
The most important number before any leveraged trade is not your target, it is your liquidation price. Simplified formula for an isolated long position: entry times (1 minus 1 divided by leverage). The higher the leverage, the closer liquidation creeps to your entry.
It is triggered off the mark price, not the last price of a single exchange. The mark price comes from an index of several exchanges, so that a single wick does not liquidate you for no reason.
- 10x at an entry of 100,000: liquidation around 90,000, only 10 percent of room.
- 20x: 5 percent of room. 50x: about 2 percent.
- Calculate the liquidation price first, then set the stop in front of it, never behind it.
- If your technical stop sits behind liquidation, the leverage is too high.
Why you derive position size from the stop, not from the leverage
The correct causal chain does not start with the leverage. Position size is determined by the stop. First you decide where your trade is invalidated, then how much you risk. Leverage in the end is only whatever is left over to finance the position.
Formula: quantity equals (account times risk percent) divided by (entry minus stop). If the stop is further away, you automatically trade less, instead of squeezing the stop tighter.
- Example: 1,000 USDT, 1 percent risk, entry 100,000, stop 98,000, gives 0.005 BTC.
- Goodman recommends only 0.5 to 1 percent per trade for crypto.
- The reason is correlation: in a crash almost all coins fall together.
- Drawdown math: a 50 percent loss needs 100 percent to get back, 75 percent needs 300.
Sources: Elder, Goodman, Schwager, Taleb
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