High Volatility and Position Sizing
Daily moves of 10% are common in crypto. See how high volatility magnifies drawdowns, and why position size matters.
Risk warning: forex, CFDs, options, futures and crypto assets usually involve leverage or high volatility, and you can lose more than you put in. This lesson only teaches the concepts; all numbers are for illustration and are not investment advice.
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Text version · Crypto Basics, lesson 4: “High Volatility and Position Sizing”
Daily moves of 10% are common in crypto. See how high volatility magnifies drawdowns, and why position size matters.
High volatility: 10% in a day is common
The higher the volatility, the bigger the price swings, and the drawdown (the fall from a peak) can be very deep.
Down 50% needs up 100% to break even
After a loss, getting back to even starts from a smaller base. So only put in money you can afford to lose: position size decides how deeply a crash hurts you.
Position size decides how deep it cuts
Same halving: all in, your total assets lose 50%; only 20% in, they lose just 10%. That's position sizing: decide first how big a loss you can take.
Key takeaways
- High volatility means big price swings, and drawdowns can be very deep.
- A 50% fall needs a 100% rise to recover; rising 50% then falling 50% leaves you down 25%.
- Size your position: only put in money you can afford to lose. Your position size decides how badly a crash hurts you.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Click "Example 1": the coin falls from $100 to $50. How much does the breakeven math panel say it must rise?
- Click "Example 2": with only 20% in, how much do total assets lose relative to your capital when the coin halves?
- Raise the position to 100% and play from the start: what's the maximum drawdown? Then lower it to 20% and compare.
- In the breakeven math, drag the drop to 90%: how much does it need to rise to break even?
Quiz and explanations
- 1. A coin falls from $100 to $50. How much does it need to rise to get back to $100?
- Answer: 100%.$50 has to double to get back to $100.
- 2. You have $10,000 and put only 20% into crypto. The coin's price halves. How much do your total assets lose?
- Answer: 10%.$2,000 × 50% = $1,000, which is 10% of your total.
- 3. A coin rises 50% and then falls 50%. Compared with where it started, it's…
- Answer: −25%.1 × 1.5 × 0.5 = 0.75, a 25% loss: the fall is measured from a bigger base.
Terms in this lesson
- drawdown (Drawdown): How far an account has fallen from its peak; the deeper the drawdown, the harder it is to recover.
- position sizing (Position Sizing): Deciding how much to buy on each trade based on how much risk you can take.
- volatility (Volatility): How wildly the underlying's price swings; the bigger the swings, the more expensive options get.