Trading cryptocurrency can be an extremely lucrative activity for a skilled trader. The volatile nature of the market is a trader’s dream, given the high number of trading opportunities that exist on any given day. However, trader’s can often get burnt trying to make money trading the market, and the major reason for this is improper risk management. In this article, we will explore some risk management techniques that successful traders typically use to avoid blowing up their trading account.
Stop Losses and Take Profit Targets
Stop losses and take profit targets are one of the easiest tools to use whilst trading cryptocurrency. Stop losses are crucial for protecting traders against huge losses in the event that a trade goes wrong. Conversely, take profit targets also stop traders from being greedy. Take profit targets do this by making a trader aware of the price that they should sell and take profit. These tools are the cornerstone of any good risk management strategy, and they can both be automated through the use of crypto bots and crypto signals.
Another frequently used tool in the risk management arsenal is position sizing. With position sizing, traders will only use 1% of their overall trading capital. This is designed to prevent traders from going on tilt and blowing up their trading account. For example, if Bob were to go on a 10-trade losing streak, Bob would still have 90% of his trading portfolio. Further to this, position sizing also means that Bob would progressively be using a lower proportion of his trading account with each losing trade.
A lot of traders would say that this is likely one of the most important risk management tool to use. Successful traders are successful because they only enter trades that have a high probability of success. With the risk to reward ratio, a trader will determine how likely their profit target is to get hit, and will then conduct their trade analysis from this. The risk to reward formula is laid out as follows:
(Target – entry)/(entry – stop loss)
As a general rule, the following guidelines should be followed with the formula:
- 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
To conclude, successful traders are successful because they understand how to mitigate risk in each trade. By practicing proper risk management strategies these traders avoid blowing up their account and instead are able to consistently generate returns from the market.