Contents of this article:
Earnings on cryptocurrency entails risks due to market volatility. Using technical and fundamental analysis, a trader can make predictions, but they are not always accurate, and it is impossible to avoid risks by 100%. They can be managed by protecting your deposit from being drained. How to do it? Use risk management! We will talk about the principles of risk management and how to calculate the risks for a trading position.
Why is risk management important?
Risk management is a set of rules that help a trader manage risk by losing limited amounts of funds on unsuccessful trades. Risk management is necessary in order not to drain the deposit. Risk management plays no less important role than trading strategy and money management for money management.
It is necessary to master the principles of risk management immediately, preparing for trading on the stock exchange. It is worth doing this in practice, starting trading with a small deposit.
Principles of risk management
Simple and clear risk management principles make this system efficient and convenient for traders of all levels. A predetermined risk plan helps the trader make the right decision quickly in case of an unsuccessful transaction, without wasting time, without risking even more money.
Your risk management system should include the following risks:
For a deal. Each trade has potential risks, and they need to be identified before opening a position. It is recommended to start with a risk per trade in the amount of 0.5% of the deposit. The maximum allowable risk for experienced traders who prefer to earn at a comfortable pace is 1% of the deposit. Such a loss will not become a problem, will not affect your emotional state.
For a day. You must limit the risks on the trading day. During the day on the exchange, a trader who adheres to the principles of risk management can afford to lose from 3 to 5% of the deposit.
For a week. The maximum allowable loss during the trading week should not exceed 10% of the deposit. Market trends can change rapidly. If you feel such changes, and at the end of the trading week your loss reached 10%, you should pause trading, analyze mistakes, and possibly adjust your trading strategy.
For a month. It is not recommended to set the monthly risk rate higher than 20%. If you lose a fifth of your deposit in a month, you will experience losses, but such losses will not prevent you from continuing to earn on cryptocurrency. In order to avoid such a mistake in the future, you will have to reconsider your trading strategy.
Maximum risk for the entire period of trading. Successful traders try to set the amount of this type of risk within 30% of the deposit. A loss of 30% is considered a serious drawdown, but psychologically it is quite easy to bear. After taking a break and reviewing your tactics, you will quickly return to trading and be able to return to the plus.
How to calculate the risks for a trading position?
By using the risk management principles above, you can easily and quickly calculate the acceptable risks for your deposit. For example, if your deposit is $ 5000, the risk system will look like this:
per trade – 1% = $50;
per day – 5% = $ 250;
for a week – 10% = $500;
for a month – 20% = $ 1000;
maximum risk – 30% = $1500.
By following this system, you will save about 70% of the deposit even in a bad month. This will allow you to continue earning on cryptocurrency without serious stress, develop, improve your skills and become profitable. But do not forget that with the systematic achievement of the maximum risk, it is necessary to revise the strategy in order to stop losing the deposit. Your trading tactics should be in line with the current trend and be flexible, so it is worth working out before trading, taking into account the goals and the state of the crypto market.
Learn to manage risks and earn effectively on cryptocurrency. Join the Crypto Crew Team and become a member of our community. Training with experienced mentors will reduce the number of mistakes at the start, within a month after the start of the course you will master the basic skills of a trader and be able to make successful transactions on your own.