Trading

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RISKS ASSESSMENT AND FORMULATING A TRADING PLAN

No one wins 100% of the time, and the top 1% of traders in the world know this. That is why successful traders view themselves first as risk managers and only secondly as traders.

In other words, if you want to succeed in anything, including cryptocurrency trading, you’ll need to be comfortable taking on risk inevitably.

Throughout this trading guide, you’ll learn how to manage the inherent risk of trading and how to protect your account and make more money at the same time.

It is a fact that most of the new traders in the markets lose their money within the first months of their trading journey. This is a consequence of not having a trading plan which is the foundation for succeeding in this profession.

Some of the elements to establish a solid trading plan includes:

– It is the primary reference upon which the trading plan will be based; it could be technical analysis or

– It refers to the strategies used to find new trading opportunities and time the market. Some popular methodologies are price action, moving averages, indicators, price structure, more.

– It is the process that defines the guidelines about how the risk is going to be managed during a trade, and it is one of the most important elements to have a real edge in the market.

– That is where traders will execute their orders and where all the actions happen. It should be a market with enough volatility, liquidity, and ease of execution. The cryptocurrency market fulfills those conditions because it has a good range of movement, leverage and can enter long and short with convenience.  

Familiarizing The Risks Management Process

The risk management process is all about how to handle losing trades. 

The main goal is to mitigate losses. It is not a secret that some of the most profitable traders in the world have excellent risk management tools that have made them be the top tier in the profession.

 (a billionaire trader,) who in many interviews has mentioned that a great part of his risk management strategy is to always look for asymmetrical risk-reward trades. Usually, with a risk ratio of 4:1, it means risking $1 to get $4 of potential profit. 

In layman’s terms, trading risk management is a system that allows you to handle the risks per trade efficiently.

Some of the elements that define a good risk management strategy are:

– What is your risk appetite per trade? In other words, it is a value that depends on the risk profile of each trader. The value should express a percentage of the trading account balance in which it can go from 0.1% and up to 4% per trade. 

– It defines the quantity of an asset that is going to be bought or sold. It directly relates to the risk per trade value because, based on that parameter, the position sizing is established. It is important to notice that leveraged markets indeed offer a better opportunity to open a bigger position with smaller capital. Still, if the position is not well-managed, the losses can be quite significant.

– It is the location of the initial stop-loss after the entry is triggered. The level is defined based on the trading methodology a trader uses. For example, if the trade is executed around a support level, you should then place a long-entry stop-loss below that area.

– The trailing stop refers to how the stop-loss order is moved when the trade goes in the expected direction. The idea is to lock in some profits if the market is in reversal. There are many strategies for how to trail the risk— but usually moving averages, average true range (ATR) levels, trend lines are some of the best indicators to reduce risks and protect profits.

– The profit target refers to the areas where the trader will take the profits of the position. Ideally, the profit targets should have an asymmetrical risk-reward ratio where the potential gains are several times the number of risks.

 is the relationship between the risk of any given trade and the potential reward. Usually, it is advisable to establish trades with an asymmetrical risk-reward ratio because, in that way, you can have a small win percentage and still be profitable. 

However, the goal should be defined based on the market structure and not at a random level. For example, if a long trade is getting closer to a resistance area, it would be good to take profits because a reversal to the downside is likely to happen.

Nevertheless, it is important to keep in mind that the trading strategy defines how the profit targets will be managed. Usually, some methods of profit-taking are:

– Close the entire position at a pre-defined level.

– Close a percentage of the position and let a runner go with a trailing stop method.

– Let the full position be managed by the trailing stop method, so the exit is executed when the trailing stop-loss is triggered.

The number one risk rule is before entering the market, you must know the amount of money you’re willing to lose if the trade goes against your expectations. 

Typically, the amount of risk is a percentage of the trading account. Beginners should use a risk of 1% or lesser to play defensively and protect the capital while learning how to trade properly.

 (1% rule) is the rule of thumb that suggests that you should never put more than 1% of your capital or your trading account into a single trade. Generally, traders with higher account balances would go with a lower percentage. Look at it this way, if the size of your account increases, so too does your position. Hence, it would be best to minimize your losses by adhering to the rule below 2%.

After the risk percentage is defined, and then the position size of the trade should be calculated. In the next example, you should probably have an idea of how the calculation works out.  

Based on the trading strategy, the entry and stop-loss levels are defined. In this case, the long-entry is triggered based on the break of the bull flag.

Where the difference between the entry and exit should be calculated. In this case, you have to subtract $45,650 (stop-loss/risk) from $46,450 (entry), resulting a difference in $800.

Subsequently, find the proper position size that represents the risk that you are willing to take. If you have a 1% risk rule in an $80 account, you should buy only 

. In the worst-case scenario, the maximum amount you will lose is 1% amounted to $800. 

The formula to find the position sizing results from dividing the risk in dollars by the difference between the entry and risk price.

You should always diversify your portfolio because a bigger exposure to different markets and instruments will provide more trading opportunities. In the end, it’ll average out the probabilities of taking a significant loss by only one adverse movement.

When interpreting diversification in trading risk management, it means you should not only stick to one trading strategy. That’s because the market is always in motion, and the market environment is ever-changing. Instead, prep yourself with the knowledge to handle trade-offs in case your position goes sideways. 

In the end, diversification means you’re creating a more balanced risk profile to maximize returns over an extended period.

Trading risk management works just fine for day traders. Though sometimes the intraday movements mixed with leverage are a double-edged sword because they can exponentially increase the profits and the losses. 

Therefore, if you are day trading, having a trading risk management system in place is a must because it will guarantee your capital the protection it needs. At the same time, you are protecting your position from liquidated.

In the same way, it is advisable to diversify your day trading with a few strategies with the idea of decreasing the probability of risk of ruin. 

So, What Are The Returns I Should Expect?

The expected return can be measured in relation to the risk. Many professional traders use risk units to express the potential target and define if the trade is worth taking. Usually, the target zones are defined based on the market structure where supply and demand can be found.

For example, the next 60-minute chart of BTCUSD is a great example to illustrate this concept.

In a nutshell, a profitable trading strategy often looks for high-risk-reward ratio scenarios mixed with a reasonable win percentage. In that way, the profitable trades will offset the losing trades and leave substantial profit levels. 

Usually, the equity curve of an efficient trading risk management system. It is normally smoother to the upside because the profit levels are broader.

For example, the next hypothetical scenario, where a day trader has a 50% profiting chance with an average risk-reward of 2.5x, will yield a good equity curve. From a graphical perspective, you can see how the winning trades impulse the equity curve to the highs.

Ultimately, when you look at the graph, you must understand that sometimes the win percentage of a system doesn’t matter as much as the way how the risk and the losing trades are handled.

, cryptocurrency is one of the most volatile investment assets. 

Crypto volatility is inevitable, and the risks are associated directly with the trade execution. 

In fact, investing in cryptocurrencies means you’re very well be exposed to the risk of losing your password, hacks, legal issues associated with the market dynamic (liquidity, leverage, exchanges, more.)

Above all, how can you guarantee your funds to be safe in a crypto exchange? And is your existing trading risk management sufficient?

The cryptocurrency risks are primarily associated with the structure of the cryptocurrency market. What follows are three examples of cryptocurrency risks that hinder market progress:

Another critical risk with cryptocurrencies is the lack of clarity in terms of regulation and legal framework.

Nowadays, with the general public’s increasing interest in the cryptocurrency market, it is frequent to find many scams that are not regulated and eventually have led many victims to fell into their traps.

Hence, finding trustworthy crypto exchanges and crypto wallets to have a secure trading environment. Usually, some of the best crypto exchanges have higher trading volumes where most people and institutions are trading. That said, 

, promises one of the best and most secure trading environments for crypto derivatives users.

 behind the network acts as a distributed ledger or a public record of all transactions. 

However, the problem is Bitcoin’s energy consumption used by miners is enormous. These miners need to solve complex computational math problems called “

” to record a single transaction that amounted to scalability issues. 

In this regard, Bitcoin’s high energy consumption might threaten the public’s adoption of blockchain technology.

The custody of the cryptocurrencies is done through digital wallets either a (hot or cold wallet.) Still, they are susceptible to be hacked or destroyed. 

Paper wallets and hardware (physical) wallets are deemed the safest way to store all your digital assets.

Crypto Trading Risk Management Strategies You Must Know

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