Trading the cryptocurrency market without safeguards can be like skydiving without a parachute. Anyone serious enough about trading would do well to incorporate money management techniques with their trading plan to protect their portfolio. A key part of your trading approach will need to involve having an appropriate position-sizing methodology, a sound stop loss placement strategy, and prudent money management techniques. These “parachutes” will help you keep losses to a minimum so that losing trades can be more than offset by positive ones, allowing you to survive and trade another day.
Let’s take a moment to recall how the numbers work in any trading regimen. On a total Dollar, Euro, Pound, or another domestic currency basis, your winning trades must maintain a “60/40” split over your losing trades. That proposition may sound easy enough, but every time you create a position in the market, you are starting at a loss, due to fees and Bid/Ask spread dynamics. The must create an “edge” to ensure a probability for success, but what is the biggest problem? Novices tend to get emotional about a loss, remove any stop/loss protections, and then suffer an even larger loss. The reverse is true for winners. Fear may force an early closure of a big winner, as well.
Your trading plan should help to curb your emotions, but there are several risk and cash management methodologies that will ensure that you do not overstep your safety limits or suffer total burnout of your trading balance. Here are the three major ideas to take away from this discussion and, by all means, test on a demo system first:
We recommend that you start small and always trade the same amount on each trade. The size of the position will depend on your risk tolerance and how often you trade. A “Day Trader” may have multiple trades in one day and only risk 2 to 5% on each trade. A “Swing Trader” may hold a position for a few days and may feel comfortable with 5% or higher, but the idea is the same – you want to survive and be ready when the strong trends arrive. Experiment with leverage, but be cautious. Typically, you will have a 2:1 or 3:1 profit objective, which will define at the start when you expect to close the position or consider resetting stop/loss orders to lock in gains;
Stop/Loss orders are designed to automatically close a position when they are breached. We counsel Beginners to buy at Support levels (Resistance, if shorting), and then place the order beneath (Over for shorting) that level at a loss that you are willing to absorb. Resist the temptation to remove or adjust a stop/loss order, when the market turns on you. A major part of becoming a successful trader is learning to accept losses and move on. No one is perfect at this game, nor are any robots perfect either, despite the outrageous claims of some salesmen in the industry. Losses happen;
The best advice in this category is to repeat oft-heard aphorisms related to investing and trading:
Only risk what you can afford to lose;
Take what the market gives you;
Cut your losers early, and let your winners run;
Never bet the ranch;
Avoid using too much leverage;
Avoid taking too much heat;
Do not give in to greed; and
Always let the trend be your friend!
These methodologies were designed to ensure that you can return to trade another day. Even veteran traders have losing streaks, but the trick is to manage your way through those and then offset those losses when the major winning trends return. It is also important to review the fine print in your broker’s agreement. Many will not guarantee stop/loss orders during turbulent times. Be prepared to act accordingly on your own behalf to protect against downside risk.