Cryptocurrency trading is a very profitable activity for the best traders. The volatile nature of the crypto market presents countless trading opportunities that traders can capitalise on. However, being a successful trader is largely down to one’s ability to manage risk. Proper risk management can mean a trader avoids bad calls and makes money on good calls. Let’s take a look at a few techniques that traders are using in the market to mitigate risk.
Stop Losses and Take Profit Targets
Starting off with probably the most basic risk management technique are stop loss and take profit targets. Stop losses are useful in safeguarding traders against large losses if a trade goes bad, thus, allowing the trader to experience minor losses in comparison. Take profit targets are important because all traders should have an exit strategy when a trade is placed. By setting a take profit target, a trader has a set price at which they will exit their position at a profit. Stop losses and take profit targets can all be automated with the use of tools such as crypto bots and crypto signals.
Position Sizing
A lesser known but equally important technique is position sizing. With position sizing, traders will look to only commit 1% of their trading capital on any single trade. This way, if a trader were to go on a bad losing streak e.g. a 10 loss streak, the trader would still have 90% of their overall trading capital. The added benefit of position sizing is that traders, with each loss they make, will be using a progressively lower proportion of their trading capital.
Risk/Reward Ratio
Probably the most important risk management technique a trader can use is being able to judge the risk to reward ratio of any single trade. As mentioned earlier in the article, the best traders avoid bad calls, and only take trades that have a high probability of succeeding. The risk to reward ratio formula is the following:
(Target – Entry) / (Entry – Stop Loss)
As a general rule, the following guidelines should be followed with the formula:
- If it’s lower than 1:1 never place a trade
- 1:1 is breakeven
- 1:2 is great to trade
- 1:3 is even better and is an ideal ratio
Conclusion
To conclude, being a successful trader is largely due to one’s ability to manage risk. The crypto market is volatile, and inexperienced traders often lose their entire trading capital because of improper risk management. This article has covered just a few strategies that traders use, there are countless other techniques that can be applied to trading in the crypto market.
