There is no doubt that you will experience adverse events when trading crypto. By negative events, we mean trades that go against your desired outcome, unusual price spikes, mistakes, and many more unpleasant happenings. Risk is normal in trading; every crypto trader takes risks. Crypto futures traders take more risks because they tend to use leverage regularly.
Not following due risk management practices affects your trading balance, and you can even lose your capital.
Risk Management
Risk management practices capture how you intend to manage your risk when trading. They protect you against the downsides of your trades and keep you in control of your losses.
Risk management is a plan that allows you to preserve capital while trying to grow it through investing in risk assets. Everyone got their plan depending on their risk appetite.
Unfortunately, many people buy assets without having a risk management plan which is a recipe for disaster sooner or later.
"I'm all in on "x" crypto because it is strong, will do great things, and will make me a millionaire." This is a common expression.
While it can be confirmed that a coin can perform well, the whole concept is wrong. Being all in without a plan differs from gambling and betting your money at the casino. What separates an investor from a gambler it has a strict plan.
So, how can you prepare for sound risk management?
Here are several practices that can help you.
1. Define the Portfolio Size you Will Trade With
The primary way that works efficiently is by splitting your portfolio into two parts:
One for active trading
One for long-term holding.
This allows you not to have to worry about what your long-term portfolio is doing (rebalance overtime needed) while trading. As such, it will become an edge on FOMO if the market starts to rip higher.
2. Define your Risk
Defining how much risk you are willing to take in every situation is essential. You need to be conscious of your risk percentage/tolerance.
Trading with 1% is way different than trading with 10%. If you're not confident, trade with less (1/3%). The higher the risk, the bigger the reward, and the more significant the potential loss. Remember that your primary goal is to protect your capital at ALL COSTS.
3. Define your Trading Style
Your risk percentage is closely correlated with your trading style. If you are a scalper, you will probably make plenty of trades in a day, so you should play with small percentages.
If you are a swing trader, your time horizon is longer, so you will probably risk a little bit more on a trade because you will care less about intraday movements. Everything is relative, so start first to know who you are and what you want to do.
4. Position Size
In a trade, you must determine your entry, target, and stop loss BEFORE entering a position. When doing so, you know the risk/reward ratio for that trade and whether it's worth it.
Final Thoughts
Remember that there's no perfect plan; the important is to find your way. There are traders better than me who use multiple indicators and make money.
Everyone is in financial markets to make profits, not for charity purposes. If you are in a trade and it gets to the point where you take a screenshot of your account, then it's time to sell.
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