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- The major appeal of trading cryptocurrency is that it offers individuals the opportunity to generate a sizeable monthly income.
- Starting off basic, stop losses and take profit target values must always be set before entering a trade.
- Position sizing is especially great for limiting losses on a bad losing streak. Good traders will avoid trades with poor risk to reward ratios and take trades that have good risk to reward ratios.
Trading cryptocurrency is a hugely popular activity in the crypto space that is only likely to grow as more individuals become familiar with cryptocurrency. The major appeal of trading cryptocurrency is that it offers individuals the opportunity to generate a sizeable monthly income. However, achieving this can be very difficult, especially for beginner traders. A large part about being a successful cryptocurrency trader is being able to manage risk. Generating returns trading crypto is often more about avoiding bad trades than it is about making good ones. Let’s take a look at some risk management strategies that any trader can use to gain an edge in the market.
Stop Losses and Take Profit Targets
Starting off basic, stop losses and take profit target values must always be set before entering a trade. Stop losses are valuable because they prevent traders from hemorrhaging losses if a trade goes in the wrong direction. Stop losses are especially effective in preventing emotional trading. For example, beginner traders tend to make the mistake of thinking that the price will turn around and go their way if they are in the red. This almost never happens and almost always leads to further losses that can be prevented with a stop loss. Take profit targets are simply price targets that traders will sell and make a profit at. Take profit targets to prevent traders from getting overly greedy in a live position. Stop losses and take profit targets are great trading tools to use alongside crypto bots and crypto signals to manage risk and eliminate emotional trading.
Position Sizing
Position sizing is a slightly more complicated but just as effective risk management technique that traders can use in the market. Position sizing is especially great for limiting losses on a bad loss streak. With position sizing, traders can never risk more than 1% of their overall trading capital. This way, if a trader was to go on a 10-trade losing streak, they would still have 90% of their trading capital. Also, the great thing about position sizing is that if a trader were to go on a losing streak, they would be progressively using a smaller proportion of their overall trading capital. Conversely, a winning streak would see a trader progressively using a higher proportion of their overall trading capital.
Risk/Reward Ratio
The success of any trader will be dependent on how well they can weigh the risk to reward ratio of placing a trade. Good traders will avoid trades with poor risk to reward ratios and take trades that have good risk to reward ratios. The risk to reward formula can be summed up as:
(Target – entry)/(entry – stop loss)
In addition to this, as a general rule of thumb, you can use the below as a guide when determining the risk to reward ratio of a trade:
- 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
Being a successful cryptocurrency trader is difficult but can be extremely rewarding due to the consistent monthly returns that can be generated. Risk management is a large part of this, and so should be taken seriously. We have highlighted a few techniques that you can use, but make sure to keep on learning as there are much more risk management strategies out there!
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