Risk Management 101: The Secret to Safe and Stress-Free Trading
The crypto markets give us crazy volatility for making massive profits in a short amount of time! But it’s a double-edged sword, because you can wipe out your entire trading account balance just as quickly…
So what’s the winning solution? Practicing good risk management! Doing this makes trading much less stressful, as you’ll have a pre-made plan that keeps you safe even when things go wrong!
There is no ‘one size fits all’ for risk management, here’s why:
It wouldn’t make sense if Adidas only produced shoes in 1 size right? Everyone has differently shaped feet… So if there was only one size, it would be too small for some, and too big for others.
The same idea applies to risk management.
There isn’t a single risk management strategy that you can just copy-paste. You may follow certain ideas across the board but you need to manage risk based on your unique situation!
Here’s an example:
A millionaire trading a $5,000 account may take bigger risks in order to make quick money and use some crazy leverage in order to try and double their account every day.
On the other hand someone might be trading a $5,000 account and that’s all they have as their life savings. They’d need to be MUCH MORE cautious with their risk levels.
However, one thing is common for both people; they must know what risk management is and create rules based on their personal situations.
One Universal Risk Management Rule: Defining Max Risk Per Trade
Regardless of your trading account size, defining your max risk per trade is one risk management approach we recommend everyone considers.
Typical recommended risk is 1-2% of your entire account per trade. For explanations sake, we’ll go with 2% risk per trade based on a $10,000 trading account.
So what does it mean to only risk 2% per trade?
With a $10,000 account you would only want to risk losing a maximum of 2% ($200) per trade. In other words, if a trade hits a stop loss, you should not lose more than $200.
Example of how to only risk 2% per trade:
In order to not lose more than $200 (2% of a $10,000 account) on any specific trade, you need to calculate how much money you can place on a trade based on the stop loss & entry price distance.
Let’s say we want to buy Litecoin at $200 with a stop loss set at $180.
In this case, we calculate that our stop loss is 10% from the entry. This means whatever amount you put into the trade will lose 10% in value if stop loss is hit.
Now in order to not lose more than 2% of our trading capital ($200) per trade, the maximum position size for our Litecoin example would be $2,000. We will lose a maximum of $200 if the stop loss order is triggered (10% of $2,000 = $200).
Here’s how you’d calculate that:
Now let’s assume a different scenario. What if the entry price is $200 and stop loss is $190? In this case the stop loss is 5% from the entry price, meaning you could take a $4,000 position size. You would still only lose $200 if the trade goes wrong (5% of $4,000 = $200).
Here’s how we’d calculate that:
And another scenario! What if the entry price is $200 and stop loss is $196. Well that’s just 2% difference, meaning you could go all in and invest the entire $10,000 if you are convinced about the trade (2% of $10,000 = $200).
Defining Max Risk per Trade: In conclusion…
The position size you can open on a trade depends entirely on your maximum account risk % per trade and how far the stop loss is from the entry price.
You can use fixed logic of x% maximum risk per trade, or if you’re more experienced you can have variable logic based on the different strategies we have for our signals.
Either way, it’s CRITICAL to know your max risk per trade well in advance - even before you open the trade order form.
We’ve talked about max risk per trade. Now let’s talk about managing your risk overall:
When you have many trades open at once and the market decides to dump, you can lose a lot of money very quickly.
But this isn’t to say you can never have many trades open at once. The crypto market moves up and down in cycles for various pairings, and you can learn to play them to your advantage!
BTC or USDT pairings? Choose carefully.
ProfitFarmers trading signals are all based on either USDT or BTC pairings:
USDT pairings tend to benefit from BTCUSDT moving UP in price! BTC pairings tend to benefit when BTCUSDT goes DOWN in price. Some coins are very strongly correlated to BTCUSDT movements and the rest are loosely correlated.
Here’s one example, just look at how SRM/USDT moves very similarly to BTC/USDT. These screenshots were taken on the 1hr chart at the same time period for each coin pairing.
Once you begin to understand and read these patterns, it becomes much easier to know which coin pairings could be good or bad to trade on. Here are 2 ideas that are commonly followed by experienced traders:
Idea 1: Trade USDT pairings more frequently when you expect BTCUSDT to breakout and uptrend.
USDT pairings will benefit from BTC/USDT showing strength. It can be good to trade USDT pairings when BTCUSDT is in a strong uptrend.
Idea 2: Trade BTC pairings more frequently when you see weakness in BTCUSDT and Bitcoin Dominance.
BTC pairings will benefit from BTCUSDT showing weakness. Typically BTC pairs explode when Bitcoin dominance is dropping and BTCUSDT is moving more sideways or down.
Here’s how you protect yourself from a sudden dumpening:
It’s not wise to open many trades at once for a particular coin pairing (for example, coins paired with USDT) as the markets are correlated. When it dumps everything may hit stop loss at the same time.
So in order to not risk too much, you need to also restrict the number of trades you have open at the same time on either USDT or BTC pairings.
So consider calculating your overall risk as if all of your trades were to hit stop loss. A good rule of thumb is to NOT RISK more than 5-10% of your account for all USDT pairs and 5-10% of your account for all BTC pairs.
Going back to our example with a $10,000 account and 2% max-risk per trade, if you have 5 USDT trades open at once then you’re risking 10% of your entire account. Same is true for your BTC trades. It’s that simple to calculate, you just need to actually do it.
Note: The above is not a hard rule, our platform often creates multiple USDT signals at the same time but we perform a lot of extra checks to ensure that the coin has the momentum required to perform well rather than just following a ‘correlation pattern’.
When is it safe to go more all in?
Taking more risk is usually a bad idea in the long run, however, there are times when opportunity comes knocking and it’s actually correct to ‘double down’.
Usually this is when the market has a clear and established trend (up or down) on higher time frames.
If you have a clear bullish breakout and sentiment is great then you may want to capitalise on that moment. Opposite if the market is dumping.
Clean trends never stay around forever but are the best trading times.
Final Thoughts:
Risk management is the most important piece of the trading puzzle. If you can survive for long enough, you can learn to thrive. If you don’t use sound risk management techniques, it’s really just a matter of time before you blow up your account.
Make your trading journey safer and less stressful by getting in the habit of practicing good risk management today! Don’t forget, you can use our position size calculator to make it easier too
Remember - Your money, your responsibility.