As much as crypto has a very profitable ground for various traders in the ecosystem, many traders are very concerned about liquidating their funds. At this point, traders deploy risk management as a way of safeguarding their funds from liquidation.
One of the psychology of trading is understanding how to manage risk in trading. The fact that risk management appears as one of the psychology of trading shows the market is embedded with a lot of volatility. The market is volatile in the sense that it can work against your trading order and might as well liquidate your fund.
As a good trader who understands the ways of financial institutions, you need to make risk management a priority whenever you are placing trading orders. In today's technical analysis process, I will be doing an expository explanation of risk management part one.
What is risk management?
For every trader to manage their fund in the crypto ecosystem, risk management should be the first priority.
Risk management is a process where traders take measures or parameters to protect their fund from liquidating in the market whenever they are trading. When trading as an investor or trader, you must understand that the market has so many traders placing orders at different points in the market; definitely, the market is swinging both against you and in your favor, and the market is also volatile. Therefore, the act of risk management should be your priority.
Many investors and traders have been liquidated because they lack the habit and knowledge to manage risk while trading.
Hence, to manage risk, there are a lot of parameters to consider. When you follow these parameters, it will be of good help to your trading life, and it will also help you manage your funds from liquidating in the market.
Parameters for risk management.
Do not open more than three positions at a go.
Position trading is the act of keeping a trade open for a long period of time while you watch the price movement within a certain period of time. Position trading is more concerned with price movement within the years and months, in contrast with short-term position trading.
As a trader, it is more advisable not to open more than three positions while trading; this will help to save you from losing your funds. Opening more than three-position trades might put you at the edge of liquidity because you might not determine the volatility of the market; the market might work against your trading position; losing the three positions might seem better than losing all your funds; you can still open another trade that will help you recover. If you lose your fund by opening more than three positions, you might not recover from the loss. Therefore, it is advisable to open just three or fewer positions in trading.
Maximum of 1.5% stop loss [SL] and 5% take profit [TP].
As a trader, there is always a point where you manage your stop loss and take profit. Take profit occurs when your order mitigates where you have decided to move out of the market while your stop loss is at the spot you decided or set to exit the market when the market is going against you.
Many traders always make mistakes around here. If they want to make excessive gains, they then increase their take profit to the point where the market cannot mitigate their order, and they also forget to set their stop loss.
Setting your stop loss helps you save funds even when you are not there to manage the market. When your stop-loss is automatically positioned, it moves you out of the market when the market is going against your order.
It's advisable to place your stop loss at 1.5% when entering the market and your take profit at 5%. No matter how you have seen the market or how perfect the signal might be, it will put you on the saver side of the market against liquidity.
Maximum of 20-25X leverage on any open position.
Leverage is a way a trader increases their trading positions by borrowing funds. How does this work? For $1000 of the trader's money, he can control a $10,000 position by using 10X leverage. Leverage is just like borrowing funds from the broker, thereby using your margin as collateral for the broker to save your capital.
While you use leverage as your borrowed funds, the margin saves you from liquidity, but it is advisable to set your leverage less to be on the saver side of the market. High leverage puts you at risk of losing liquidity. If you place leverage beyond 20X, which implies you are borrowing more to control a smaller margin, this might put you at risk of liquidity when the market is against you.
Don't add more margin to a losing trade.
Margin enables traders to control a large number of tokens with just a few funds. This can only happen by traders borrowing funds from brokers to trade a large position in trading.
Many traders are of the opinion that when the market is against you, adding more margin to a position triggers you back or makes the market move in your favor. This is actually wrong. When the market is against you, adding more margin places you at risk of liquidity. The only thing you can do is leave the market or deploy the dollar cost averaging [DCA] strategy, which can help you restructure the trading position. As a trader, it's not advisable to add more margin to a losing trade.
Use a maximum of 2-10% of your capital to open a position.
Don't use the whole of your capital to open a position. Sometimes you might get a signal or might have done a very sure analysis that might want to prompt you to use the whole of your capital to open a position, but you have to be careful because you can determine the swing of the market. The market might not work in your favor.
Therefore, it is advisable for a trader to never use the whole of their capital to open a position; you can use just 2-10% of your capital. In case the market moves against the margin, you will still have more funds on the ground to open another trade position.
As a trader who is looking at making more profit in trading, learning how to manage trading risk is very important. Don't just think you understand the trading parameters and feel you can neglect the risk around them; this will expose your funds to liquidity. Managing risk in trading is very important for a trader.
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