Trading cryptocurrency is becoming an increasingly lucrative activity. The volatility of the crypto space presents numerous trading opportunities that can be capitalised on. However, a large part about being able to profit from trading opportunities is mitigating risk. There are numerous ways traders mitigate risk whilst trading, and this article will cover some of these techniques.
Stop Losses and Take Profit Targets
Stop losses and take profit targets are fundamental risk mitigation techniques that all traders should be using. Stop losses are important because they stop traders from experiencing severe losses if a trade does not go correctly. In addition, take profit targets are great for focusing a trader’s mind on the price at which they should be exiting their position at a profit. Traders should also look to add automation tools to their trading toolkit, for example crypto bots and crypto signals.
Position sizing is another key risk management tool that traders use whilst trading in the crypto market. With position sizing, traders on a losing streak are prevented from blowing up their trading account. For example, position sizing suggests that traders should not use more than 1% of their trading capital. So, if a trader goes on a 10-trade losing streak, with position sizing, they would still have 90% of their trading capital. Further to this, if a trader goes on a losing streak, with position sizing, they would be progressively using a lower proportion of their capital.
Being able to weigh up the risk to reward ratio of a trade is another vital risk management strategy. This is because a key feature of a good trader is being able to avoid bad trades, and this risk management technique is vital in achieving that. 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
To conclude, to be a successful trader in the crypto market, practicing risk management strategies are vital. Proper risk management techniques prevent traders from blowing up their accounts and experiencing severe losses. This article covers just a few risk management techniques, and there are a lot more techniques out there. So, go out and explore which strategies work well with your trading style.