Risk Management Techniques for Crypto TradersProper risk management stops ill-disciplined, degenerate and naive traders from exploding their cash stash. (Their trading account)
If a trader can manage their risk/exposure to loss he/she stands a better chance of surviving the inevitable pitfalls which in turn can open the door to making money in the market.
Remember this, a trader who has profited substantially can lose the lot in just one or two bad trades executed without a risk management strategy.
In order to survive in this jungle where be in no doubt, you are the prey, you will need to learn the art of protecting your trading profits.
The Prerequisites of Proper Risk Management
- Staying focused
- Trading to a plan
- Keeping emotions on lockdown
- Reminding yourself constantly that even the best traders use risk management to prevent losses from spiralling out of control.
- Knowing when to take profit
- Knowing where your stop losses are and why you have them there.
- Knowing how to ‘live to fight another day’ through strategic placement of stop-loss orders.
- Have pre-planned stop loss(SL) and take profit (TP) points.
- Never hold and hope
Think Like A SniperImagine you are a sniper without backup going deep into enemy territory. Would you just stroll on into an enemy camp with doing your due diligence. of course not! You would need a plan and that plan would need to be executed with the utmost caution and professionalism. The more conservative you are the longer you will stay alive Proper risk management prevents us from making silly and stupid mistakes.
Think like a sniper!
The 1% RuleFollow the one-per cent rule, meaning only 1% of your capital can be used in a single trade. So if your trading account holds $1000, you can only trade $10 per trade. If your trading account holds $10000, you can only trade $100 per trade.
Stop Loss PointsWhen a stock breaks below a key support level, you need to have already set a stop loss point. When this is hit you have made a loss The stop loss prevented you from losing even more Stop losses are there to prevent us from ‘chasing the loss.’ Just like a sniper your decisions must be programmed before. Just like a sniper, it pays to be cold, detached and clinical. A well-placed stop-loss point will save you a lot of money!
The Take Profit PointThe take profit point is where a trader will sell a stock and where a trader takes profit on his trade Just like a sniper, the trader must also pre-plan his exit strategy.
Where Should I Set My Stop-Loss Points?
- On/just under or above key moving averages such as the 5, 10, 20, 50, 100 & 200-day MA.
- On/just under/above support & resistance lines.
- Ascending/Descending wedges and triangles as support and resistance points
- Fibonacci levels
- Gann levels
Uncle Bob is a veteran of the crypto game. None of what is written should be taken as financial advice and before investing everyone should do their own due diligence.
Uncle Bob has a well-followed crypto-related Twitter account and can be viewed here