Risk sizing for altcoins with highly variable liquidity?
Been trying to get a handle on proper risk sizing, especially when dabbling in some of the smaller cap altcoins. The standard 1-2% per trade based on stop loss works fine for $BTC or $ETH where I'm pretty confident in my ability to exit near my predetermined stop.
However, with some of the lower liquidity coins, I've noticed significant slippage can eat into that if the market moves against me quickly. Sometimes my 1% risk based on a static stop turns into 2-3% realized loss just from execution. It makes position sizing a real headache because the actual risk is so much higher than what my backtest or initial calculation suggests.
Are people generally reducing their position size even further for these, or maybe widening their stops to account for potential slippage, accepting a larger potential loss on paper to avoid getting stopped out on a phantom wick? Or is it simply a case of accepting that these trades inherently carry a higher, less predictable execution risk that needs to be factored in beyond just the stop loss percentage? How are you guys accounting for this variability?
This is a tough one. For highly illiquid alts, I usually size based on a percentage of my portfolio I'm willing to lose on that specific coin, rather than a stop-loss based on price action, as slippage makes that unreliable.