Risk Management in Crypto

In this article I try to give you an overview about what it means to manage risk when trading Bitcoin or altcoins. Every pro trader is using the word risk management when talking about Bitcoin trading strategies and it’s one of the most important terms in the whole field of trading.

What Does Risk Management Exactly Mean?

Use Small Percentages Of Your Capital For Single Trades

First of all, risk management includes the wise attitude never ever to go all in. What you should do, is excactly the opposite. Always trade with low percentages of what you own. Every trade includes the risk to lose money, so a single loss should never be too destructive concerning your total assets. Imagine you go all in and lose half of your Bitcoins in a clumsy single trade. Don’t ever let that happen.

So a wise trader always takes only a small percentage of his/her capital for a single trade and then splits that again in some parts for different entries and take-profit-levels.

Trading Example:

For instance: Let’s assume you have 3 Bitcoin as complete trading capital. Now you want to make a day trade with BTC against USD within a bear trend, so you want to sell and buy back at a lower price.

For this trade you take 3% of your capital, for instance, which would be 0.09 BTC in that case. So now, within the trade you split this position again in a couple of parts. This means that first you set a sell order with 20% of your 0.09 BTC, for instance. When you see that the market behaves in your favour, you sell another 10% or 20% and so on, till you’ve sold your complete 0.09 BTC.

In case price should rise suddenly again within your trade, before you’ve sold all of your 0.09 BTC, you’ll be happy that you’ve splitted the position and haven’t sold all at once when the sudden price rise happens. So you’ve manged risk. On the other hand, if price keeps falling till you’ve sold all of your 0.09 BTC, then you can set buy orders the same way, to securely lock in profit stepwise.

Have an Estimation for the Duration of a Single Trade

Before entering a trade, you should have an expectation of how long it will take till price hits your target levels. Pro traders usually don’t leave a trade open for an extended period of time if nothing happens, so they are able to use the capital for another trade. Having a plan means getting out again if the trade doesn’t look like expected shifts anymore and gets boring. For traders it is not interesting to leave capital stuck in a never-ending sideways movement of price.

Position Sizing – Splitting Positions

This tactic is really crucial when it comes to risk management. It means, as shown in the example above, that you can and should sometimes partially get out of trades, or split your exits in different amounts for different exit targets. For instance, if you’ve planned to sell on a higher point in an uptrend, set the first target at a relatively low security point, where you’re definitely already going to take profit – although it’s not yet that much.

This might already be 30% of your whole position, for instance. Then you can set another or two other targets, each on a higher step. So these higher price levels might also be hit, if the market does what you hope it would. But if the price should go down earlier, before one or even two higher targets are hit, you at least have taken profit at the first step and you might still be able to exit now early enough at the downtrend.

If you miss to get out with the rest of your position because price suddenly falls, you can either hold it longer term or just get out at a partial break even or maybe even still in little profit. Because: Even if you get into a loss with a part of your position you might be still in overall profit or at break even because of the partial profit you took early.

That way you already have some profit, and that’s what you should look for. Secure profits, although they might not make you rich quickly, are better than the risk of losing money. This strategy separates traders which are successful in the long run from those who are not.

Note that a reasonable behaviour in this case must be practiced. There is noone born as a successful trader. And also not – and this is one of the most important mind sets one MUST have as a trader – there is nothing wrong with profit. No matter how small it might be – a profit is a profit and always a thousand times better than a loss.

Accept Losses as Part of the Game

But don’t fear losses. It’s very important to keep a cool mind and understand that losses are always part of the game. For every trader in the world. The only thing is that you must win more than you lose, if you watch your trading as a whole. That’s all.

Therefore use Stop Losses

Pro traders use stop losses always. A stop loss rescues you from losing too much in one single trade. Although you do lose sometimes, those losses must be controlled. Only with this control you can make sure that overall you are still winning.

Knowing your Risk to Reward Ratio

The combination of the 3 basic parts of your trade – your entry, your exit target and your stop loss – shows your risk to reward ratio. How much you can gain compared to how much you can possibly lose. In crypto the reward assumed should be several times higher than the risk.

Of course, the awaited profit is always just a guess. But based on TA there can be profit targets that look very likely, within a certain period of time, distinguished on former highs / resistance levels. A next predicted resistance level can be taken as a minimum profit target, to see your risk versus reward ratio. If price should go further, all the better.