Trading cryptocurrency is an activity that is increasingly become the norm, with countless individuals trading crypto in an attempt to generate consistent returns from the market. A large part about being a successful cryptocurrency trader is being aware of risk management. Practicing proper risk management can be the difference between generating very high consistent returns and losing everything. In this article, we will explore some popular risk management techniques that you can be using in your trading.
Stop Losses and Take Profit Targets
The first risk management technique that all traders should be practicing is setting stop loss and take profit targets. Stop losses are important because they prevent the risk of more severe losses in the event that a trade does not go your way. In a similar vein, take profit targets are vital for traders because traders need to be aware of the price at which they are willing to take profit on their trade. Not planning the stop loss and take profit targets can be disastrous for traders because they are likely to fall prey to emotional trading. For example, if no stop loss is set, it is possible that a trader will be unwilling to cut their losses and exit a trade because they think that the price will rebound in their favour. Crypto trading bots and signal groups (e.g. crypto signals) are useful tools in allowing traders to set their stop loss and take profit target before entering into a trade.
Position Sizing
This is another important risk management technique that all traders should be practicing. The theory behind position sizing is that a trader should not risk more than 1% of their trading account on any one single trade. For example. If a trader goes on a 10-trade losing streak, he or she will still have 90% of their trading portfolio. Furthermore, because the trader is fixed at 1% they will be using a lower proportion of their trading balance if they were to go on a losing streak. In contrast, if a trader is doing well and goes on a 10-trade winning streak, you will be using a higher proportion of your trading balance as it grows.
Risk/Reward Ratio
Being able to determine the risk to reward ratio of a trade before it is placed is also vital to be a successful trader. If a trader can determine the expected return of a trade compared to the risks, then they are much more likely to only take trades with a higher probability for success. Meaning that in the long term, you should be trading at a net positive.
The risk to reward formula is as follows: (Target – entry)/(entry – stop loss)
You can also use the below as a rough guide for determining the risk to reward of a trade:
- If it’s lower than 1:1 never place a trade
- 1:1 is breakeven
- 1:2 is great to trade
- 1:3 is even better and is an ideal ratio
Conclusion
Risk management is the first important step in being a successful trader, and as a result, it should be taken seriously by beginner traders. These are just a few techniques that one can be using in their trading. There are a lot more risk management techniques out there, so make sure that you are aware of the most crucial ones.