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How to use proper risk management thread.
First i want to get a few things out of the way:
• There is no "best" way to do this.
• I will be explaining my experience and what works consistently for me.
Let's start!
First i want to get a few things out of the way:
• There is no "best" way to do this.
• I will be explaining my experience and what works consistently for me.
Let's start!
2) There are a few steps that are, in my opinion, necessary to start off your trading adventure.
1. Define the portfolio size you will trade with.
2. Define your risk appetite.
3. What is your main trading style?
4. How do we determine position sizing?
1. Define the portfolio size you will trade with.
2. Define your risk appetite.
3. What is your main trading style?
4. How do we determine position sizing?
3) Defining your portfolio size 
Personally, i found it very liberating to have my portfolio's split into a long term "hodl" portfolio and a trading portfolio.
I set aside some BTC at one point that is ONLY for trading and NOT for long term investing.
Personally, i found it very liberating to have my portfolio's split into a long term "hodl" portfolio and a trading portfolio.
I set aside some BTC at one point that is ONLY for trading and NOT for long term investing.
4) This way i don't have to worry about what my long term portfolio does while trading, since i don't plan on selling those positions anytime soon.
5) It's also easier to track your trading gains/losses within your trading portfolio if you don't have long term holds in the same portfolio.
Lastly, it is important to define how much you are willing to trade with. Let's say we trade with $1000 (0.085 BTC atm) for now.
Lastly, it is important to define how much you are willing to trade with. Let's say we trade with $1000 (0.085 BTC atm) for now.
6) Define your risk.
It is important to define how much risk you're willing to take.
This means that if your trading portfolio is worth $1000, and you take 1% risk per trade, your risk in USD per trade will be 1000 * 0,01 = $10.
Or 0,085 * 0,01 = 0,00085 BTC per trade.
It is important to define how much risk you're willing to take.
This means that if your trading portfolio is worth $1000, and you take 1% risk per trade, your risk in USD per trade will be 1000 * 0,01 = $10.
Or 0,085 * 0,01 = 0,00085 BTC per trade.
7) The risk percentage you take per trade is personal preference. I personally like using 1% as a standard and 2% when there is a strong trending market where it's usually easier to trade.
The higher the risk, the bigger the reward, but also the bigger the loss, obviously.
The higher the risk, the bigger the reward, but also the bigger the loss, obviously.
8) What is your main trading style?
Your risk percentage can also be entirely dependent on the way you trade. If you're a scalper (Quick trades with tight SL's and big positions) you may do tens of trades A DAY.
If this is you, it might be smart to use a smaller risk %.
Your risk percentage can also be entirely dependent on the way you trade. If you're a scalper (Quick trades with tight SL's and big positions) you may do tens of trades A DAY.
If this is you, it might be smart to use a smaller risk %.
9) If, on the other hand you mostly do mid/longer term swing trades, you might be just fine with a higher risk percentage per trade. Since you don't take many trades and your SL is likely to be further out, therefore reducing the chance of many lost trades in quick succesion.
10) So how do we determine what position size we should take?
You have to determine your entry, target and stop loss BEFORE buying into a position.
When you did so, you know the risk/reward ratio you're getting for that trade and if it's worth taking it.
You have to determine your entry, target and stop loss BEFORE buying into a position.
When you did so, you know the risk/reward ratio you're getting for that trade and if it's worth taking it.
11) Do you think the odds of your trade reaching it's target Vs hitting the stop loss is 50/50? But the target is twice as far away from your entry as your stop loss? (Risk/Reward Ratio of 2:1)
Then this will likely be a profitable trade in the long run.
Example below:
Then this will likely be a profitable trade in the long run.
Example below:
12) To know what position size you should be taking i recommend using the "Long Position" and "Short Position" tools on Tradingview.
These can be found in your toolbar.
These can be found in your toolbar.
13) When using these tools, you can enter exactly all the information we've just went through:
• Your account size (In BTC in the case of trading ETH/BTC)
• Your Risk Percentage
• Your Entry, Stop loss and Target.
You can also adjust these last three by moving the tool.
• Your account size (In BTC in the case of trading ETH/BTC)
• Your Risk Percentage
• Your Entry, Stop loss and Target.
You can also adjust these last three by moving the tool.
14) If you did all that, you get a nice overview of the risk/reward you get and the position sizing
First number being the difference from your entry to the current market price.
Second being the position sizing in ETH in this case. Being 0.34 ETH.
Third being the Risk/Reward.
First number being the difference from your entry to the current market price.
Second being the position sizing in ETH in this case. Being 0.34 ETH.
Third being the Risk/Reward.
15) We can confirm that this position sizing of 0.34 ETH is correct when taking a 1% risk on a 0.085 BTC portfolio.
0,34 ETH is our position. The stop loss is 7,14% from our entry.
0,34 * 0,0714 = A loss of 0,024276 ETH.
0,024276 * 0,0035 (entry price) = ~0,00085 BTC.
0,34 ETH is our position. The stop loss is 7,14% from our entry.
0,34 * 0,0714 = A loss of 0,024276 ETH.
0,024276 * 0,0035 (entry price) = ~0,00085 BTC.
16) In conclusion:
Using proper risk management helps you stay in the game. It saves you against inevitable loss streaks and reduces the drawdown your portfolio has immensely.
Find out what works well for you and stick with it if it's working.
Using proper risk management helps you stay in the game. It saves you against inevitable loss streaks and reduces the drawdown your portfolio has immensely.
Find out what works well for you and stick with it if it's working.
17) I hope this has helped you and taught you the basics of risk management in case you were still struggling in this part of your trading.
Let me know if you have any questions and share this with others which you think this thread might be helpful for.
Let me know if you have any questions and share this with others which you think this thread might be helpful for.
