Trading cryptocurrency as a means of generating additional income has become more and more fashionable with countless individuals now doing it. There are a plethora of ways of trading in order to be successful, but a key reason is the enacting of strict risk management practices. Proper management of risk is the difference between consistently generating wins, and consistently generating losses. In this guide, we’ll explore some popular risk management techniques that you can use to simplify your trading and make a return.
Stop Losses and Take Profit Targets
First on the list is the use of what are called stop losses and take profit targets. Stop losses are fundamental as they prevent further losses from happening if you’re in a bad trade. On the flip side, profit targets are powerful for traders because they are a method of automatically securing profits when a trade is going well.
Not using a stop loss or take profit target can fairly often be problematic for traders. As an example, if no stop loss is placed, there’s the unfortunate scenario where a trader refuses to shut down a losing trade because they believe it will rebound in their favour and make them a nice return. Crypto trading bots and signal groups (e.g. crypto signals) are useful tools in allowing traders to put their stop loss and take profit target before stepping into a trade.
Position Sizing
The second risk management method that all traders should be utilizing is position sizing. The notion that comprises position sizing is that as a trader, you shouldn’t risk 100% of your trading account on one trade ever. This is to prevent the loss of a trader’s entire capital if that trade were to go badly. Instead, a trader should be looking to use only a small percentage of their entire balance, e.g. 1%. This then has the positive effect of allowing the trader to manage any unforeseen risk that may occur, and hopefully in the long run, generate substantial profits.
Risk/Reward Ratio
The third, but not least, risk management technique that should be used is the concept of the risk/reward ratio. Understanding if a trade offers more reward than risk is a basic idea that many traders fail to grasp. If a trader is only entering trades that they stand more to win than lose, then over the long run, they will make more in returns. It also means that they won’t necessarily have to enter into a lot of trades to make a net return. The key lesson here is, enter into a trade where your take-profit target will give you more reward if it were to be hit, than if instead your stop loss target was hit.
The formula for calculating risk/reward 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:• 1:1 is breakeven
• 1:2 is great to trade
• 1:3 is even better and may be a perfect ratio
Anything less than 1:1 risk/reward ratio is taken to be an unfavourable trade and is usually not recommended.
Conclusion
To conclude, these risk management techniques are simple and straightforward for a novice trader to understand and more importantly, to implement. It is something that all the successful traders are doing, and as such, if you want to increase your chances of making a return, you should too.
Image by mohamed Hassan from Pixabay