Risk strategy: The key to being a profitable crypto trader

In Trading

Trading crypto can be extremely lucrative. If you’re good at it, it’s an opportunity to work from wherever you want, whenever you want.

Could you do it?

Most people aren’t cut out for trading. It’s mentally draining and psychologically taxing.

Above all else, successful cryptocurrency traders are separated from the losing traders by one main thing: risk strategy.

What is risk strategy?

Risk strategy is simply the art of considering the risk during every one of your trades, every time. Risk strategy is your approach to managing risk while you’re trading. It’s a rule book that you follow, to the letter, every time you enter a trade.

Take it from Peter Brandt, one of the most well known, respected technical traders.

Peter enters every trade knowing there is a risk. He recognizes that every single trade can go wrong. Due to this, Peter has a risk strategy in place to ensure if the trade is indeed wrong, the loss will be cut short.

Over time, having a 50% failure rate for your trades can be very profitable. All you have to do is maintain a successful risk strategy and you’ll be able to cut your losses short and let your profits run.

How to develop a solid risk strategy

Taking losses

You have to be able to take a loss as a crypto trader. Get it into your head now – if you are going to trade, you’re going to lose. All traders lose money sometimes. We know that.

You take losses early to cut them short. A lot of traders are afraid to take the loss, which ends up cascading into massive losses and putting them in a much worse position than if they had taken the initial smaller loss as planned.

When you enter a trade, know where you will exit if it goes wrong. This leads us on to stops.

Set your stops

Stop losses are an amazing tool. You use them to close your trade to stop your loss getting any bigger. All you have to do is decide where you want the trade to stop and if the price gets there, your trade will close.

Every single time before you enter a trade, you need to figure out at what level your trade will have gone wrong. At that point, that’s where you would want to exit your position and take the loss.

All you have to do is calculate where your trade is "wrong" and place your stops there. That way, you can keep losses to a minimum. Here are a couple of examples.

Example 1

A trader has spotted a strong support level (yellow) and waits for it to be re-tested.

Later, the price comes down and bounces off the support level, confirming it’s still holding strong. A trader could then open a long position, with a stop under the support level incase it breaks.

Example 2

Bitcoin rose quickly to a new high for 2019 before a sharp drop. Traders were looking for a long opportunity but wanted to make sure the correction was over. When Bitcoin bounced off 9,050 USD, many traders thought that was a bottom.

After some upward movement, Bitcoin returned down towards the low of 9,050 USD but failed to breach it. Bitcoin printed a higher low.

A trader could then have opened a long position as shown, with a stop at invalidation. Their idea would be wrong if Bitcoin then continued down and made a new low.

Bigger isn’t better

Every good risk strategy helps you decide the size of your position. You cannot be a trader and constantly trade with the same position size.

Not all trades carry the same risk. If the trade is riskier, you should have a smaller position so you don’t have as much capital at risk in case the trade goes wrong.

Ensure your position size is sensible for the amount of risk you are undertaking.

Risk vs reward

Not all trading opportunities are equal.

Technical analysis will return targets, which gives you an indication of where exactly you think the price will go. Take the target, combine it with the level of invalidation and work out the risk vs reward ratio.

There’s no hard and fast rule, but you shouldn’t be entering a trade without at least a 1:2 risk vs reward ratio. If you win 50% of the time, this will still net a nice profit.

Stick to your guns

You’ve got a trading risk strategy for a reason. Stick to it.

Don’t enter trades unless you have evaluated the risk and you are more likely to win than lose. Use stop losses. Make sure your position size is appropriate for the trade.

If you miss a trade, don’t chase it. Plenty more will come around. Chasing trades is a dangerous game.

Stay safe out there.

New call-to-action

This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.

WRITTEN BY

Liquid

Providing liquidity for the crypto economy.