The purchase and sale of what is known as cryptocurrencies as a means of producing additional cash are becoming very popular among the middle class. However, as with everything, there exists a risk that must be properly understood in order to ensure profitability; the main way of doing this is to use something called risk management. Proper management of your risk is the most important thing to know about as it will determine if you’re profitable or not. This article will take a look at some of those risk management strategies so you can start using them for yourself.
Stop Losses and Take Profit Targets
Source: AdmiralMarkets
Stop losses and take profit targets are the number one risk management technique that you need to understand. Stop losses must be used in your trading because they limit your losses by a larger amount than if you had not used one at all. On the opposite side, take profit targets are a tool that allows traders to ensure they make a return by taking profit automatically for you.
Not using either a take profit or stop loss will severely prohibit traders from being successful, they really are the first things you need to know how to use when it comes to trading. Consider the following illustration, if a trader does not use a stop loss, a trader can fall victim to emotional trading by refusing to close a trade because they believe it can reverse. Crypto trading bots and signal groups (e.g. crypto signals) are important for the automatic implementation of a take profit even before you enter a trade. This means you do not necessarily have to make decisions by yourself at the moment.
Position Sizing
A second important risk management strategy is using and understanding position sizing. The principle behind position sizing is that you should only ever use an acceptable amount of your money for any given trade. What you should avoid doing at all times is using 100% of your balance. This will properly protect you if for any reason whatsoever a trade were to go wrong. Instead, you need to be using a small portion of your money, for example, 10% for each trade. This then means that if a trade were to go terribly wrong, you would only lose a small part of your capital and not all of it.
Risk/Reward Ratio
Risk/reward ratios are the final risk management technique we will be addressing in this guide. Rudimentarily speaking, any trade you enter into must make you more money than you lose. It is a basic concept, but by applying it to all of your trades, a trader can make significantly more income on a monthly basis without needing to get every trade correct. The important lesson to grasp here is this: the risk/reward ratio must be favorable before you enter into the trade.
The formula for calculating risk/reward is as follows:
(Target – entry)/(entry – stop loss)
You can use the below guide/template guide for knowing what a good and bad risk/reward ratio looks like.
- 1:1 is breakeven
- 1:2 is great to trade
- 1:3 is even better and maybe a perfect ratio
Anything less than a 1:1 risk/reward ratio is unfavorable and should not be a trade you want to enter into all the time.
Conclusion
To finish off, you do not need to be an expert trader to practice fantastic risk management. Basic things like using a stop loss and take profit target are more than enough to make sure you stand a better chance of being a profitable trader.
Featured image: Entrepreneur
