As the crypto market started its journey in 2009 with the emergence of flagship currency on the scene, new products and services started were created to help the traders and investors. Volatility has been one of the main aspects of the crypto realm. With the volatility in the scene, the risk of losing capital also emerges. Successful traders are those who don’t lose money despite the volatility and other things. Successful traders always create a trading plan before jumping into the market.
Risk management is of extreme importance in the formulation of a trading plan. A complete trading plan consists of A succinct trading approach, Trading Methodology, Risk Management, and Markets to trade. Let’s take a look at risk management and its different elements. After this calculating risk will be discussed at large.
In simple words, risk management is all of the things that a trader does to mitigate losses. If we look at the statistics, we will come to know that successful traders always have the best risk management tools to help them trade. Leaving trading because it is risky, is not the solution. However, finding the best tools to help them trade is the zeal of the traders.
A billionaire trader, Paul Tudor Jones, has revealed in many interviews that he always goes for asymmetrical risk-reward trades. He also told the risk-reward ratio, 4:1. It means that he is willing to lose $1 for the profit of $4. Some key elements of the risk management strategy are discussed here.
- Risk per trade: This defines the risk appetite of a trader. Simply, this is the value that depends on the risk profile of each trader. We will suggest that you should utilize 0.1% to 4% per trade.
- Position Sizing: This is the quantity of any digital asset being bought. One thing is worth noting that leveraged markets offer a better opportunity to open a bigger position with low capital but liquidation can also happen.
- Initial Risk Level: The initial risk level in the trade is the spot of the initial stop-loss after entry triggers.
- Trailing Stop: The trailing stop refers to the situation where the trade goes in the expected direction. Traders should lock some profit in case of market reversal. The tools like moving averages, trend lines, and average true range help the trader to analyze the market more deeply.
- Profit-Target: This term refers to the points where the trader has to take profit of their position. An asymmetrical risk-reward ratio will provide a better gain to the trader.
No trader should define his goals based on a random level. For example, if a trader opens a position that is near to the resistance level then he should take the profit and leave because trend reversal is a must in this situation.
There are also two further ways in which traders can make a profit.
- Close the entire position at a set level
- A fraction or part of trade can also be closed and the remaining trade will go with a trailing stop method.
How to measure risk?
A trader must consider the following to measure the risk. The number one thing is to look for the risk percentage. Newbies in the crypto market are advised to use a risk 0f 1% or lesser for a trade. Many successful traders have used this 1% rule. If a new trader wants to invest more then there is a limit of 2% risk.
After the risk percentage is defined, traders should determine their position size. The formula for the position size is given as:
Risk/Difference between entry and risk price
Let’s take an example to understand it. The image is showing the entry, risk, and current price of the coin. If we want to calculate the position size of this particular trade, then by utilizing the above formula we have to subtract $45,650 (Risk) from $46,450 (Entry). Here 1% rule is utilized and traders can use this formula to trade their position size accordingly.
In the case of an $80 portfolio, the trader will only lose 1% amounted to $800 if he buys the 1 lot of BTCUSD. It should also be noted that you should not stick to one trading strategy. The talented traders always seek the best opportunity and take the risks. Exposure to the different markets will help the trader to have more opportunities.
Risk Management Strategies:
There are many ways by which a trader can minimize the risk. A few of these are discussed here.
Using Multiple timeframes:
Many professional traders have suggested looking at the bigger picture in different timeframe. Don’t worry I am not talking about Multiverse here. Usually, professional traders use a top-down approach where the analysis is focused initially on the bigger timeframes and then filter the market signals by looking for trades in lower time frames.
The picture attached shows that there are 10 candles with the price of the asset going up without any correction. A well-trained trader will understand that market will retrace to the downside. So, he will look for signals and entry positions.
In the 1H chart, one clear thing is that there are many trade signals and entry points for the trader to start. That’s the result of looking into a broader timeframe context.
Remember Stop loss:
Stop-loss is an order that helps to cut the losing trades. It is the primary tool for risk management because the investor can manage the trades effectively when the outcome is not expected. It is advisable always to place a stop-loss order to avoid considerable losses and decrease the risk of ruin.
Binance Future Trade:
How to calculate risk:
Suppose you have $100 in your account and you want to buy a BNB with 5x leverage. The price of the one unit of BNB is $500. In this case you will get 1 BNB. Now if the price of the BNB increases by $1 dollar you will get a profit of $1. In case the BNB loses $1 you will also lose $1 dollar.
When the price of BNB will reach at a mark of $402, your account balance will wash out.
Let’s take another example to see what happens if you try to increase your leverage to 10x while you have the same amount of assets and BNB price is also same.
As we can see in this attached picture the increased leverage has brought liquidation a lot closer than before.
Risk Management plays a key role in the trader’s life. People might say that market is volatile, a professional trader will never make such excuses. He will make a perfect trading plan and then by following the plan he will trade. Make your own way in this market.