In the volatile world of cryptocurrency trading, one aspect often overlooked by novice and even experienced traders is the crucial role of position sizing. As someone who recently experienced the rollercoaster of crypto markets firsthand, I’ve come to understand just how vital this concept is. Let me share my story and the lessons I’ve learned.

Last month, the crypto market was riding high. Bitcoin touched $70,000 per coin, and Solana reached $190. Like many others, I was caught up in the euphoria. My positions were all green, and my confidence soared. This led me to make a critical mistake: I began averaging up too aggressively, increasing my exposure without properly considering the risks.

Then, as it often does in the crypto world, sentiment shifted rapidly. Several factors contributed to a bearish turn:

1. The Bank of Japan increased interest rates to 0.25%, their second hike this year, unwinding the USDJPY carry trade.
2. U.S. non-farm payroll data came in hot, while unemployment ticked up. With the Federal Reserve maintaining rates, this sent recession signals.
3. Genesis Trading, a bankrupt crypto lender, began distributing creditors’ assets, signaling potential increased selling pressure.
4. These negative sentiments culminated on a Friday, amplifying their impact on market participants.

Suddenly, my long positions were underwater. Instead of reassessing my strategy, I doubled down, continually averaging down in hopes of a V-shaped recovery. But as the saying goes, “The market can remain irrational longer than you can remain solvent.”

Realizing my error, I attempted to compensate by opening short positions. While this helped stem my losses, it was a reactive rather than strategic move. Eventually, I closed all positions at break-even, securing my capital but erasing last month’s gains.

This experience taught me the hard way about the importance of proper position sizing. Here’s what I’ve learned:

1. Never let overconfidence dictate your position size. Past performance doesn’t guarantee future results.
2. Always consider the potential downside. Ask yourself: “Can I afford to lose this much if I’m wrong?”
3. Use a consistent method for position sizing. Many traders use a fixed percentage of their trading capital per trade, adjusted for the perceived risk.
4. Be prepared for market shifts. Have a plan for both bullish and bearish scenarios.
5. Don’t average down (or up) blindly. Each additional investment should be a conscious decision based on new information, not hope.
6. Understand the correlation between your positions. Diversification in crypto can be challenging but is crucial for risk management.
7. Be aware of broader market factors. In crypto, even seemingly unrelated news can have significant impacts.
8. Have clear exit strategies for both profit-taking and loss-cutting. Stick to these plans despite emotional impulses.

The crypto market’s extreme volatility makes it both exciting and dangerous. Without proper position sizing, even a string of successful trades can be wiped out by one overleveraged position.

Today, I’m starting fresh with a renewed focus on risk management. My strategy remains to long the strongest tickers and short correlated assets, but with a crucial difference: I’m implementing strict position sizing rules based on my total capital and the specific risk of each trade.

Remember, in trading, it’s not just about being right about the direction. It’s about managing your risk so that when you’re wrong (and everyone is sometimes), you live to trade another day.

Position sizing isn’t the most exciting aspect of trading, but it might just be the most important. It’s the difference between long-term success and a blown account. As I’ve learned the hard way, in the world of trading, respecting position sizing isn’t just advisable – it’s essential.