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Walkthrough: crypto margin trading risk strategy
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To make more money, you have to protect the money you already have.
It takes practice to put emotions aside and to trade with ruthless focus. This is certainly true of margin trading, where ineffective risk management can lead to entire balances being wiped out in seconds.
In this article, we’ll walk through some of the key areas we’ve highlighted as “danger zones” in margin trading. Having these insights will help you to ensure your current margin trading strategy is solid and sustainable.
What are you trading?
On Liquid, you can margin trade BTC, ETH and XRP against a number of fiat currencies. But, how do you know which is the best to meet your trading goals?
Your chosen trading pair is the first area of risk. How much do you know about the asset you are trading?
If you aren’t in touch with the current market environment you’re carrying unnecessary risk. One big swing in the market could spin your trade from winning to an epic fail. Stay educated to determine and anticipate potential hazards in your strategy.
Finding your entry
Nailing your entry will minimize your risk. Entering hastily can lead to subpar entries and larger losses.
To minimize risk, control your entries. Enter with a reliable risk:reward ratio. If you can’t achieve a quality entry, it’s not going to be a quality trade.
When margin trading on Liquid, you have the choice of trading Cross Margin or Isolated Margin.
With Cross Margin, your trading position is backed by the total account balance. This decreases the chances of liquidation, as your available margin is increased. But, it also technically puts your entire funding account at risk.
Isolated Margin assigns a margin amount to your position automatically. The position is restricted only to the assigned amount of margin. With Isolated Margin, you have full control over exactly how much capital is exposed to the position.
Unlike cross margin, with isolated margin your available balance isn’t automatically added to your existing isolated positions.
Each crypto margin trading type comes with its own benefits and drawbacks.
Choose the margin type that fits your trading strategy and the trade you are looking to open.
The decisions you make can keep risk under control - but, again, it all depends on the circumstances of your trade. Here are parts of a trade that can be used to control risk.
Not every trade should be the same size. A trade that carries more risk should have a lower position size to minimize losses.
Calculate your position size based on the risk of the trade. To do this, find the risk:reward ratio and then select a suitable position size based on the risk. The general rule in margin trading is to avoid a risk of more than 1-2% of your capital.
Leverage is an effective technique used to increase the size of a trade and it’s potential gain. However, it also introduces more risk.
If you are trading on margin with more capital than you actually have, risk is increased.
From then on, the higher the leverage, the higher the risk. Keep leverage under control to keep the level of risk down. On Liquid, users can trade with up to 100x leverage if they choose to.
The funding account being used for crypto margin trading matters more than most traders tend to think. Funding with a volatile asset can be detrimental for a trade.
If the value of a funding account decreases, available margin decreases too, which moves traders closer towards liquidation.
To avoid this, always keep an eye on margin coverage and ensure you are confident with your final funding choice.
Stop loss and take profit
Stop losses are mandatory for risk control when trading on margin. They are a preventative barrier that will reduce the risk of your trade losing too much money.
Stops should be placed at invalidation. You enter every trade with an idea, and your stop will be placed at a level where the trade idea would be officially wrong and it is no longer viable to have the trade open. As such, the system will close the trade automatically due to stop loss, preventing you from losing anymore money.
Setting realistic targets and exiting out of the trade with a win, is harder than it seems. Many traders can become greedy and increasingly eager to see profits continue to climb. Most of the time, this probably isn’t going to happen.
Set targets early and keep take profits in place. This allows you to walk away from the trade with profit still intact.
Managing your trade
Once a trade is live and stop loss and take profits are set, risk will only be added or removed by managing each trade.
If emotions intervene and mess with your trading, you could end up losing unnecessary funds. Conversely, if you were to ignore the market and neglect to manage a trade, you could accrue losses that could have been avoided if managed well.
Different traders have different approaches to managing their open trades. Some prefer to leave them alone and see how they play out. Others perform well by actively managing trades based on market moves.
Find out which type of trader you are by keeping a trading journal. As simple as it sounds, it could be the one technique that prevents multiple losses.
If your long term performance improves when you’re a hands on trader, you should continue to manage trades. If you perform worse, leave the trades alone.
However, don’t ignore blatant market signals. If a trade is on a downwards spiral, you have to intervene, and manage your trade. There is no reason to leave a trade open if there is no longer any confidence in its success.
Protect the money you already have by trading with care. In doing so you will allow your profits to increase and your losses to diminish.