Question 1

How much should I risk on a single trade?

Accepted Answer

Risk about 1 percent of your account on any one trade, and no more than 2 percent.

Risk here means the loss if your stop is hit, not the position's full value. At 1 percent, even ten losses in a row cost only about 10 percent of the account, which is recoverable.

Question 2

How do I calculate my position size?

Accepted Answer

Divide the dollars you will risk by the distance from your entry to your stop, per unit.

This makes the loss on the trade a fixed amount regardless of the instrument. A wider stop gives a smaller position and a tighter stop a larger one, for the same dollar risk.

Question 3

Why size on risk instead of how much I want to buy?

Accepted Answer

Because the amount you can lose, not the position's face value, is what actually threatens your account.

A $10,000 position with a stop 5 percent away only risks $500. Sizing on risk keeps leverage from tricking you into an oversized loss.

Question 4

Can a genuinely profitable strategy still blow up my account?

Accepted Answer

Yes, if you risk too much per trade, because even a good edge hits normal losing streaks.

This is called risk of ruin: a run of losses can deplete the account before the edge plays out. Small, consistent risk per trade is what keeps a profitable strategy alive.

Question 5

Where should I place my stop-loss?

Accepted Answer

Place it where your trade idea is proven wrong, then size the position to that distance.

A stop belongs beyond a support or resistance level or outside a volatility band, not at an arbitrary dollar amount. If the logical stop is too far for your risk budget, trade smaller rather than using a tighter, illogical stop.

Question 6

Should I move my stop further away if the trade goes against me?

Accepted Answer

No. Widening a live stop converts a planned small loss into an open-ended one.

A stop should only ever move in your favor, as a trailing stop. Moving it away is how a 1 percent risk silently becomes a 10 percent loss.

Question 7

If I lose 50 percent of my account, how much do I need to get back?

Accepted Answer

You need a 100 percent gain, not 50 percent, because you are now growing from a smaller base.

Recovery is asymmetric: a 10 percent loss needs about 11.1 percent, a 25 percent loss needs 33.3 percent, and a 75 percent loss needs 300 percent. This is why keeping losses small matters so much.

Question 8

What is a drawdown and why should I track it?

Accepted Answer

A drawdown is the drop in your account from a peak to a later low, and it measures how painful and survivable a strategy is.

The maximum drawdown is the worst such drop over a period. Because deep drawdowns need disproportionately large gains to recover, containing them is central to staying solvent.

Question 9

Does a stop-loss guarantee I exit at exactly that price?

Accepted Answer

No. A stop guarantees an exit, not a price, and in fast or gapping markets your fill can be worse.

That gap between expected and actual price is slippage. Size with a little room for it so a planned loss does not silently grow.

Question 10

What is volatility and why does it matter for risk?

Accepted Answer

Volatility is how much a price swings over time, and it sets how far a trade can move against you before your idea is even wrong.

It says nothing about direction, only the size of the swings. Bigger swings should mean a wider stop and therefore a smaller position for the same dollar risk.

Question 11

Does high volatility mean the price is about to rise or fall?

Accepted Answer

No. Volatility measures the size of price moves, not their direction.

A highly volatile instrument can move sharply either way. Indicators like standard deviation and ATR are directionless by design.

Question 12

How can I set a stop based on how volatile an instrument is?

Accepted Answer

Set the stop a multiple of Average True Range away, such as 1.5 or 2 times ATR, then size to it.

ATR is quoted in the instrument's price units, so it plugs straight into the sizing formula. When volatility rises, the stop widens and your position automatically shrinks.

Question 13

Why do traders multiply volatility by the square root of time?

Accepted Answer

Because volatility scales with the square root of time, not time itself, since variances add across independent periods.

To annualize a daily standard deviation you multiply by the square root of 252 trading days. The rule assumes independent returns and can understate risk during a crisis when moves cluster.

Question 14

Does a high win rate mean a system is profitable?

Accepted Answer

No. A system can win most of its trades and still lose money if its losses are large relative to its wins.

For example, a 70 percent win rate that risks 3 to make 1 has an expectancy of (0.7 x 1) minus (0.3 x 3), which is -0.2R per trade, a losing system. Win rate only matters alongside the size of wins versus losses.

Question 15

What actually makes a trading system profitable?

Accepted Answer

Positive expectancy, meaning the average result per trade is a gain once you weight wins and losses by how often each happens.

Expectancy combines win rate and reward-to-risk into one number. A 40 percent win rate at 3:1 gives (0.4 x 3) minus (0.6 x 1), or +0.6R per trade, a profitable system despite losing most trades.

Question 16

What is a good risk/reward ratio?

Accepted Answer

There is no single good number; the right ratio depends on your win rate, and only expectancy tells you if the combination is profitable.

Widening your target raises the reward-to-risk but lowers the win rate, and tightening it does the reverse. Aim for positive expectancy rather than a specific ratio.

Question 17

If I have an edge, how much of my account should I bet?

Accepted Answer

Far less than the full Kelly amount; most traders use a fraction of it, which is why the 1 percent rule is common.

The Kelly Criterion gives the growth-optimal stake, but full Kelly is very aggressive and edges are estimated with error, so half or quarter Kelly is used in practice. The 1 percent rule sits well below full Kelly on purpose.

Question 18

Why not just double my size after a loss to win it back?

Accepted Answer

Because that is a martingale, and it maximizes your exposure exactly when you are most wrong, risking an unrecoverable loss.

One extended losing run bankrupts the account. Adding to losers to average down is the same mistake in another form.

Question 19

What is leverage, and is it dangerous?

Accepted Answer

Leverage lets you control a position larger than your cash, and it multiplies both gains and losses relative to your capital.

It does not change the asset's own move, only its size relative to your money: at 10x, a 5 percent move becomes 50 percent of your equity. It is a risk amplifier, not a strategy.

Question 20

What is margin, and what is the difference between initial and maintenance margin?

Accepted Answer

Margin is the deposit you post to open a leveraged position; initial margin opens it and maintenance margin is the minimum you must keep to hold it.

Fall below the maintenance level and you face a margin call or liquidation. The gap between the two is a cushion that lets price move before the venue acts.

Question 21

Does using higher leverage make my trade more likely to succeed?

Accepted Answer

No. Higher leverage does not improve your odds; it only reduces how much room the trade has before liquidation.

The asset moves the same percentage either way. More leverage simply means a smaller adverse move wipes your margin.

Question 22

What leverage should a beginner use?

Accepted Answer

As little as needed, chosen from your risk-per-trade budget rather than the maximum a venue offers.

Low leverage keeps your liquidation price far from entry and lets your stop, not the exchange, end the trade. Most blown accounts were not wrong about direction; they were liquidated by a normal move.

Question 23

Why can my position be liquidated before the price reaches zero?

Accepted Answer

Because liquidation happens when losses draw your margin down to the maintenance level, which is reached long before the price hits zero.

At 10x leverage your whole margin is roughly gone after only about a 10 percent adverse move, and liquidation triggers slightly before that because of the maintenance buffer. The higher the leverage, the smaller the move needed.

Question 24

How do I calculate my liquidation price?

Accepted Answer

For an isolated long, a widely used estimate is entry times (1 minus 1 over leverage plus the maintenance margin rate); for a short the signs flip.

For example, a long at $60,000 with 10x leverage and a 0.5 percent maintenance margin rate liquidates near $54,300, a 9.5 percent move away. The exact figure varies by venue and by isolated versus cross margin.

Question 25

How do I avoid being liquidated?

Accepted Answer

Use low leverage and keep a stop-loss well inside your liquidation price so you exit first.

Also keep spare margin rather than posting the bare minimum, and remember that funding and fees erode margin too. Liquidation is a leverage problem, and less leverage is the cure.

Question 26

What is the difference between a margin call and a liquidation?

Accepted Answer

A margin call is a demand to add funds when equity falls below maintenance margin; liquidation is the forced closure of the position if that is not met.

On many crypto venues there is no time to answer a call and the position is simply liquidated. Both are triggered by equity reaching the maintenance level.

Question 27

What is the difference between spot and a derivative?

Accepted Answer

On spot you buy and own the actual asset now; a derivative is a contract whose value derives from that asset, which you hold instead of the asset.

Spot is direct ownership with loss capped at what you paid. A derivative lets you use leverage, hedge, or go short, but adds risks like liquidation and, for perpetuals, funding.

Question 28

What is the difference between a dated future and a perpetual contract?

Accepted Answer

A dated future has an expiry date and settles then; a perpetual has no expiry and can be held indefinitely.

With no expiry to pull it toward spot, a perpetual uses a funding rate and mark price to stay anchored. Perpetuals are the dominant crypto derivative.

Question 29

What does it mean to go short?

Accepted Answer

Going short means taking a position that profits when the price falls, by selling to open and buying back later.

In derivatives you can short without owning the asset first. This symmetry, being as easy to short as to go long, is a main attraction of futures and perpetuals.

Question 30

Do I have to hold a futures contract until it expires?

Accepted Answer

No. Most speculators close or roll the position before expiry rather than settling.

Closing offsets the contract for cash profit or loss; rolling moves the exposure to a later-dated contract. Holding a physically settled contract to expiry would obligate delivery of the actual asset.

Question 31

What is a funding rate and who pays whom?

Accepted Answer

A funding rate is a periodic payment exchanged directly between long and short holders of a perpetual to keep its price near the index; when the perpetual trades above the index, longs pay shorts, and below it, shorts pay longs.

It replaces the expiry that anchors a dated future. The crowded side keeps paying the other side, which nudges the price back toward the underlying.

Question 32

Is the funding rate a fee I pay to the exchange?

Accepted Answer

No. Funding flows between traders, from one side of the market to the other, not to the venue.

It is not a commission or a spread. It exists purely to keep the perpetual price anchored to the underlying index.

Question 33

How much can funding actually cost me?

Accepted Answer

Funding is charged on the position's notional, so leverage multiplies it relative to your margin.

A 0.01 percent rate every 8 hours on $50,000 of notional is $5 per period, about $15 a day, or roughly $450 a month. On a small margin balance that can outweigh modest price gains.

Question 34

Why is one contract not the same as one unit of the asset?

Accepted Answer

Because a contract specification sets a size or multiplier, so one contract usually represents many units.

A standard gold futures contract is 100 troy ounces, a standard Bitcoin futures contract is 5 bitcoin, and a standard stock-index future is 50 dollars per index point. Always read the spec before trading.

Question 35

What is the difference between cash and physical settlement?

Accepted Answer

Cash settlement pays the net price difference in cash; physical settlement delivers the actual underlying asset.

A stock index future is cash-settled because you cannot deliver an index, while a gold future can deliver metal. Speculators in physically settled contracts must close or roll before delivery.

Question 36

What is the mark price and why does it matter?

Accepted Answer

The mark price is a contract's fair-value price, built from the index price, and it is used for your unrealized profit and loss, funding, and liquidations.

Because liquidations trigger off the mark price rather than the last trade, a brief price spike on one venue will not wrongly liquidate you. Always know which price your venue liquidates on.

Risk and position sizing

Q1How much should I risk on a single trade?

Q2How do I calculate my position size?

Q3Why size on risk instead of how much I want to buy?

Q4Can a genuinely profitable strategy still blow up my account?

Stops and drawdown

Q1Where should I place my stop-loss?

Q2Should I move my stop further away if the trade goes against me?

Q3If I lose 50 percent of my account, how much do I need to get back?

Q4What is a drawdown and why should I track it?

Q5Does a stop-loss guarantee I exit at exactly that price?

Volatility

Q1What is volatility and why does it matter for risk?

Q2Does high volatility mean the price is about to rise or fall?

Q3How can I set a stop based on how volatile an instrument is?

Q4Why do traders multiply volatility by the square root of time?

Expectancy and win rate

Q1Does a high win rate mean a system is profitable?

Q2What actually makes a trading system profitable?

Q3What is a good risk/reward ratio?

Q4If I have an edge, how much of my account should I bet?

Q5Why not just double my size after a loss to win it back?

Leverage and margin

Q1What is leverage, and is it dangerous?

Q2What is margin, and what is the difference between initial and maintenance margin?

Q3Does using higher leverage make my trade more likely to succeed?

Q4What leverage should a beginner use?

Liquidation

Q1Why can my position be liquidated before the price reaches zero?

Q2How do I calculate my liquidation price?

Q3How do I avoid being liquidated?

Q4What is the difference between a margin call and a liquidation?

Futures and perpetuals

Q1What is the difference between spot and a derivative?

Q2What is the difference between a dated future and a perpetual contract?

Q3What does it mean to go short?

Q4Do I have to hold a futures contract until it expires?

Funding

Q1What is a funding rate and who pays whom?

Q2Is the funding rate a fee I pay to the exchange?

Q3How much can funding actually cost me?

Contract basics

Q1Why is one contract not the same as one unit of the asset?

Q2What is the difference between cash and physical settlement?

Q3What is the mark price and why does it matter?