What Does Risk Management Exactly Mean?
‘Use small percentages of your capital for single trades’
First of all, risk management includes the wise attitude never ever to go all in. What you should do, is exactly the opposite. Always trade with low percentages of what you own. Every trade includes the risk to lose money, so a single loss should never be too destructive concerning your total assets. Imagine you go all in and lose half of your Bitcoins in a clumsy single trade. Don’t ever let that happen. So a wise 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. Trading Example:
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 of 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 shared 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.
‘You must see trading as the unity of many single trades which all together let your capital slowly grow.’
Have an Estimation of the Duration of a Single Trade
Before entering a trade, you should have an expectation of how long it will take until the price hits your target levels. Pro 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.
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.
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.
Establish 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 price should go further, all the better.
In this article, I try to give you an overview of what it means to manage risk when trading Bitcoin or altcoins. Every pro trader is using the word risk management when talking about Bitcoin trading strategies and it’s one of the most important terms in the whole field of trading.