Highlights
①. The Gate Learn Futures Advanced Course will equip users with the skills to develop a professional trading system, focusing on investment strategies, trading tools, and comprehensive system planning;
②. In this issue, we will introduce practical position management strategies. From basic concepts to specific tactics, we aim to help you develop a comprehensive understanding of position management.
1. What is Position Management?
Position management, often referred to as “funds management” in cryptocurrency trading, involves managing the positions you hold. The maximum number of positions your account can support is considered a full position, while the ratio of actual positions held to the full position is known as the position ratio.
2. Importance and Necessity of Position Management
In futures trading, a common question arises: “How can I achieve substantial profits without taking large positions?” However, risk and profit go hand in hand. Amplifying the potential for profit also increases exposure to risk. This is especially critical for beginners, as unrestricted investment without guaranteed success rates can quickly lead to liquidation (another common pitfall leading to liquidation is not setting stop losses).
Position management is a risk prevention measure, not a profit-chasing strategy. Many successful traders emphasize that large positions should only be taken under highly certain conditions (such as breaking key levels), and even then, only with pre-set stop losses. Surviving in the market is the foundation for making profits.
Thus, position management is essential in the game of futures trading. Before you can accurately interpret market signals and establish a comprehensive trading system, experimenting with smaller positions is always a safe bet. While this approach may not yield significant profits immediately, combining it with stop-loss management can at least help prevent major losses.
3. How to Manage Positions Effectively？
First, it’s important to understand that position management won’t solve the problem of a low win rate. What it does is slow down the rate of losses, giving traders enough time and opportunity to catch favorable market movements. Therefore, position management should not be discussed in isolation but in conjunction with each trader’s time frame, psychological tolerance, and entry/exit strategies.
For example, trend traders often have lower win rates but higher risk-to-reward ratios. This means they need to strictly control their position sizes to reduce the cost of test trades. Once a test trade is profitable, they should continuously add to their position to improve their risk-to-reward ratio and offset the low win rate.
On the other hand, short-term traders rely on high win rates combined with low risk-to-reward ratios to achieve profitability. They need to maximize their capital utilization to ensure the highest possible profits. However, short-term traders also adhere to very strict stop-loss rules, which helps mitigate the risks associated with larger positions.
Principles of Position Management:
①. Never Invest All Your Funds in the Market: Especially for beginners or those frequently experiencing “small gains, large losses,” putting all your funds into the market can amplify losses and negatively affect your mindset. Short-term traders may take larger positions if their stop-losses are strict and their risk-to-reward ratios are reasonable.
②. Have a Scientific Strategy for Adjusting Positions: Trading is a probability game from a mathematical perspective, but it is not static. The ever-changing market may require you to increase or decrease your positions after an initial entry. Position management, including adjusting positions, is necessary as win rates and risk-to-reward ratios change with market conditions.
Position management should align with your entry/exit strategies and psychological tolerance. Here are some factors to consider when setting up a position management strategy:
①. Risk Appetite: Determine whether you are aggressive or conservative. Decide how much loss you can tolerate per trade, and align this with the stop-loss points in your trading system.
②. Win Rate: Your position management must account for your trading win rate. This ensures your capital can withstand the losing streaks that are a normal part of trading.
③. Risk-to-Reward Ratio: Win rate and risk-to-reward ratio are intertwined. Effective position management that balances win rate and risk-to-reward ratio can help you survive the worst periods in trading, so you don’t fail before reaching the profitable phases of your trading system.
In summary, position management is not an isolated or static component; it is an integral part of the entire trading system. The entry/exit strategies and position management within your trading system complement each other and are both essential for success.
4. Common Position Management Strategies
①. Rectangular Position Management
This method involves pre-determining the proportion of total funds to be used for initial entry. Subsequent additions to the position follow this fixed proportion, resulting in a rectangular shape when plotted over time. Hence, it’s called the rectangular position management method.
Advantages: Each additional position increases the overall holding cost, sharing the risk. If the market is correctly judged, this method can yield substantial profits.
Disadvantages: The holding cost increases rapidly, potentially leading to a passive situation. As more positions are added, the rate of cost dilution slows down, making it easier to become trapped in a losing position.
②. Pyramid Position Management
In this strategy, a larger portion of funds is used for the initial entry. If the market moves against the position, the trader gradually reduces the position size. Conversely, if the market moves as expected, the trader gradually adds to the position, but each subsequent addition is smaller than the previous one. This results in a structure where the base is larger and the top is smaller, resembling a pyramid, hence the name pyramid position management.
The advantage of this method is that it controls positions based on the reward ratio, allowing for larger positions with higher win rates. However, it can be challenging to generate profits in choppy or sideways markets.
③. Funnel-Shaped Position Management
In this strategy, a smaller portion of funds is used for the initial entry. If the market moves against the position, additional positions are gradually added, increasing the position size and diluting the overall cost. Each subsequent addition is larger than the previous one, forming a funnel shape with a smaller base and a larger top, hence the name funnel-shaped position management.
The advantage of this method is that the initial risk is relatively small, and as long as the position does not get liquidated, the higher the funnel, the more substantial the potential profit. However, this method requires the subsequent market trend to align with the initial judgment, demanding high-level analysis and trading skills. If the market direction is misjudged or fails to move beyond the total cost level, it can lead to a situation where it’s challenging to exit profitably.
Each of the three position management methods has its strengths. In summary, the rectangular method is suitable for choppy markets, the pyramid method is ideal for the early stages of a bull market and right-side trading, while the funnel method is best for bottom-fishing and left-side trading.
5. Summary
The significance of position management lies in its ability to provide a set of strategies and tools that balance risk and reward. It is a method to mitigate unknown risks. Position management must be integrated with trading strategies to achieve the goal of minimizing losses and maximizing gains. In practice, the choice of position management strategy should be based on market conditions, adapting flexibly to the prevailing trends.
For practical trading operations, visit the Gate Futures platform. Register for a Gate account now and begin your futures trading journey!
Disclaimer
This article is for informational purposes only and does not constitute investment advice. Gate is not responsible for any investment decisions you make. Content related to technical analysis, market assessments, trading skills, and traders’ insights should not be considered a basis for investment. Investing carries potential risks and uncertainties. This article offers no guarantees or assurances of returns on any type of investment.
