How can I shortern my command line prompt's current directory?

For people looking for a much simpler solution and don't need the name of the first directory in the path, Bash has built-in support for this using the PROMPT_DIRTRIM variable. From the documentation:

PROMPT_DIRTRIM

If set to a number greater than zero, the value is used as the number of trailing directory components to retain when expanding the \w and \W prompt string escapes (see Printing a Prompt). Characters removed are replaced with an ellipsis.

For example:

~$ mkdir -p a/b/c/d/e/f
~$ cd a/b/c/d/e/f
~/a/b/c/d/e/f$ export PROMPT_DIRTRIM=2
~/.../e/f$ PROMPT_DIRTRIM=3
~/.../d/e/f$ 

Downside: It depends on the directory level, not the length of the path, which you might not want.

Upside: It's very simple. Just add export PROMPT_DIRTRIM=2 to your .bashrc.

Consider this script using awk instead of sed for your case:

pwd_length=14
pwd_symbol="..."
newPWD="${PWD/#$HOME/~}"
if [ $(echo -n $newPWD | wc -c | tr -d " ") -gt $pwd_length ]
then
   newPWD=$(echo -n $newPWD | awk -F '/' '{
   print $1 "/" $2 "/.../" $(NF-1) "/" $(NF)}')
fi
PS1='${newPWD}$ '

For your example of directory ~/workspace/projects/project1/folder1/test it makes PS1 as: ~/workspace/.../folder1/test

UPDATE

Above solution will set your prompt but as you noted in your comment that it will NOT change PS1 dynamically when you change directory. So here is the solution that will dynamically set PS1 when you change directories around.

Put these 2 lines in your .bashrc file:

export MYPS='$(echo -n "${PWD/#$HOME/~}" | awk -F "/" '"'"'{
if (length($0) > 14) { if (NF>4) print $1 "/" $2 "/.../" $(NF-1) "/" $NF;
else if (NF>3) print $1 "/" $2 "/.../" $NF;
else print $1 "/.../" $NF; }
else print $0;}'"'"')'
PS1='$(eval "echo ${MYPS}")$ '

if (NF > 4 && length($0) > 14) condition in awk will only apply special handling when your current directory is more than 3 directories deep AND if length of $PWD is more than 14 characters otherwise and it will keep PS1 as $PWD.

eg: if current directory is ~/workspace/projects/project1$ then PS1 will be ~/workspace/projects/project1$

Effect of above in .bashrc will be as follows on your PS1:

~$ cd ~/workspace/projects/project1/folder1/test
~/workspace/.../folder1/test$ cd ..
~/workspace/.../project1/folder1$ cd ..
~/workspace/.../project1$ cd ..
~/.../projects$ cd ..
~/workspace$ cd ..
~$

Notice how prompt is changing when I change directories. Let me know if this is not what you wanted.

This is what I use based on the solutions from anubhava. It sets both the prompt and the windows title. The awk script is more readable so it can be tweaked/customized easily.

It will fold the path if it's more than 16 chars and 4 levels deep. Furthermore, it will also indicate in the ... how many directories were folded, so you get a sense of how deep the path is, ie: ~/usr/..4../path2/path1 indicates 4 levels were folded.

# define the awk script using heredoc notation for easy modification
MYPSDIR_AWK=$(cat << 'EOF'
BEGIN { FS = OFS = "/" }
{ 
   sub(ENVIRON["HOME"], "~");
   if (length($0) > 16 && NF > 4)
      print $1,$2,".." NF-4 "..",$(NF-1),$NF
   else
      print $0
}
EOF
)

# my replacement for \w prompt expansion
export MYPSDIR='$(echo -n "$PWD" | awk "$MYPSDIR_AWK")'

# the fancy colorized prompt: [0 user@host ~]$
# return code is in green, user@host is in bold/white
export PS1='[\[\033[1;32m\]$?\[\033[0;0m\] \[\033[0;1m\]\u@\h\[\033[0;0m\] $(eval "echo ${MYPSDIR}")]$ '

# set x/ssh window title as well
export PROMPT_COMMAND='echo -ne "\033]0;${USER}@${HOSTNAME%%.*} $(eval "echo ${MYPSDIR}")\007"'

Here's what it looks like in action. The green 0 is the return code of last command: