Risk budgets, position sizing, volatility, leverage, liquidation, and counterparty exposure.
By the end, you should be able to
- Separate position size from conviction.
- Explain how leverage amplifies gains and losses.
- Identify liquidation and counterparty assumptions.
The same move under different exposure
Illustrative leverage shows amplification, not a recommendation.
Start with a risk budget
Position sizing asks how much loss a portfolio can absorb if the thesis fails. The answer depends on financial circumstances, volatility, liquidity, concentration, time horizon, and obligations—not just confidence.
Leverage compresses the distance to failure
Borrowed exposure magnifies both gains and losses. Margin requirements, funding costs, collateral rules, and price volatility can force closure before a long-term thesis can be evaluated.
Liquidation is a system process
Platforms define mark prices, maintenance margin, liquidation fees, and insurance mechanisms. During stress, liquidity gaps and operational failures can produce outcomes worse than a simple threshold estimate.
What this does not tell you
- Simple leverage multiplication omits funding, fees, nonlinear products, and liquidation rules.
- Stop orders can slip or fail in fast markets.
- No generic position-size formula is suitable for every person.
Run a no-trade stress test
Use hypothetical values to expose assumptions; this is not personalized advice.
- Choose hypothetical portfolio and position values.
- Calculate losses under 10%, 25%, and 50% asset declines without leverage.
- Repeat with hypothetical leverage and list liquidation, fee, and counterparty assumptions.
Check your understanding
1. What does leverage do?
2. Why can liquidation differ across platforms?
3. What should position size reflect?