What Does Risk Management Exactly Mean?
According to Wikipedia, Risk management is the identification, evaluation, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events or to maximize the realization of opportunities.
Use Small Percentages Of Your Capital For Single Trades
First of all, a good risk management strategy will never go all in at once. What it requires you to do is exactly the opposite. Always trade with low percentages depending on your capital. Every trade has a tendency to be a loss, so a single loss should never involve your total assets. Let’s say you go all-in on a trade and your entire BTC is halved or totally lost because of a mistake on a single trade. Please don’t fall victim to that.
A smart trader always takes only a small percentage of his/her capital for a single trade and then splits that again in some parts for different entries and take-profit-levels.
Have an Estimation for the Duration of a Single Trade
Before placing a trade or entering a position, you should have an expectation of the time it might take till price hits your target levels. Expert traders usually don’t leave a trade open for an extended period of time if nothing happens, so they are able to use the capital for another trade. Having a plan means getting out again if the trade doesn’t look like expected shifts anymore and gets boring. For traders, it is not interesting to leave capital stuck in a never-ending sideways movement of price.
Position Sizing – Splitting Positions
This tactic is really crucial when it comes to risk management. It means, as shown in the example above, that you can and should sometimes partially get out of trades, or split your exits into different amounts for different exit targets. For instance, if you’ve planned to sell on a higher point in an uptrend, set the first target at a relatively low-security point, where you’re definitely already going to take profit – although it’s not yet that much.
This might already be 30% of your whole position, for instance. Then you can set another or two other targets, each on a higher step. So these higher price levels might also be hit if the market does what you hope it would. But if the price should go down earlier before one or even two higher targets are hit, you at least have taken profit at the first step and you might still be able to exit now early enough at the downtrend.
If you miss to get out with the rest of your position because price suddenly falls, you can either hold it a long term or just get out at a partial break even or maybe even still in little profit. Because: Even if you get into a loss with a part of your position you might be still in overall profit or at break even because of the partial profit you took early.
That way you already have some profit, and that’s what you should look for. Secure profits, although they might not make you rich quickly, are better than the risk of losing money. This strategy separates traders which are successful in the long run from those who are not.
Note that reasonable behavior, in this case, must be practiced. There is no one born as a successful trader. And also not – and this is one of the most important mindsets one MUST have as a trader – there is nothing wrong with profit. No matter how small it might be – a profit is a profit and always a thousand times better than a loss.
Accept Losses as Part of the Game
But don’t fear losses. It’s very important to keep a cool mind and understand that losses are always part of the game. For every trader in the world. The only thing is that you must win more than you lose if you watch your trading as a whole. That’s all.
Therefore use Stop Losses
Pro traders use stop losses always. A stop-loss rescues you from losing too much in one single trade. Although you do lose sometimes, those losses must be controlled. Only with this control, you can make sure that overall you are still winning.
Knowing your Risk to Reward Ratio
The combination of the 3 basic parts of your trade – your entry, your exit target, and your stop loss – shows your risk to reward ratio. How much you can gain compared to how much you can possibly lose. In crypto the reward assumed should be several times higher than the risk.
Of course, the awaited profit is always just a guess. But based on TA there can be profit targets that look very likely, within a certain period of time, distinguished on former highs/resistance levels. A next predicted resistance level can be taken as a minimum profit target, to see your risk versus reward ratio. If the price should go further, all the better.
For instance: Let’s assume you have 3 Bitcoin as complete trading capital. Now you want to make a day trade with BTC against USD within a bear trend, so you want to sell and buy back at a lower price.
For this trade, you take 3% of your capital, for instance, which would be 0.09 BTC in that case. So now, within the trade, you split this position again in a couple of parts. This means that first, you set a sell order with 20% of your 0.09 BTC, for instance. When you see that the market behaves in your favor, you sell another 10% or 20% and so on, till you’ve sold your complete 0.09 BTC.
In case the price should rise suddenly again within your trade before you’ve sold all of your 0.09 BTC, you’ll be happy that you’ve split the position and haven’t sold all at once when the sudden price rise happens. So you’ve managed risk. On the other hand, if the price keeps falling till you’ve sold all of your 0.09 BTC, then you can set buy orders the same way, to securely lock in profit stepwise.