Risk management is the cornerstone of every trading strategy. Prior to risking your capital, you need to determine how much you are willing to risk on each trade, as well as, how much you plan to risk trading a product. Once you have determined the amount you are willing to risk, you can then decipher your potential reward. Your profits are based on the risk you are willing to assume. A reasonable risk to reward profile is $1 to $3.
How Do You Determine Risk
The risk is the amount of money you are willing to lose. Risk management is the process of making sure that your losses do not exceed your gains. You can determine your risk based on a fixed percentage or based on a currency figure. You can also let the asset you are trading dictate the amount you are willing to lose, based on past price action. For example, you could say that on each trade, you are willing to risk $100 to make $300. Alternatively, you could look to make $30 on the price of Bitcoin and stop out if the position loses $10.
You can also use a chart to help you make a trading decision and incorporate your risk management. For example, you might consider buying Bitcoin at 4,092, and stop out if it moves below the 10-day moving average at 4, 058. If this occurred, you would lose $34. Your take profit level could possibly be 3-times that amount or approximately $100 which is $4,192.
What Can I Use to Help Me Determine My Risk Levels?
There are several tools that you can use to help pinpoint your stop loss and take profit levels. Support and resistance levels are very helpful. This can include a horizontal line which is generated from a price high or price low. A trend line that connects two points or a moving average. A moving average is an average over a specific period that moves with time. When a new day is added to the calculation the oldest day is dropped off.
Riding a Trend
There are other risk management techniques that you can use trade cryptocurrency as an alternative to a fixed risk management structure. Some traders, especially those who use trend following strategies will consider using a trailing stop loss to generate profits. A trailing stop loss strategy is geared towardward generating a robust risk versus reward profile when a market is trending. When a cryptocurrency is rangebound this strategy will help limit losses.
To initiate a trade with a trailing stop you need to initially start with a fixed stop loss. If the fixed stop loss is 2% the entry price, you may consider moving it up to the entry price when the price of the cryptocurrency increases by 2%. For every 2% rise in the cryptocurrency rate, you might want to increase the stop loss by 2%. Eventually, there will be a pullback in the price which stops you out of your position, but if the price trends you will not take profit too early.