Risk Management in Cryptocurrency Trading

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When it comes to crypto trading, there are several steps you can take to reduce your exposure to the most extreme price volatility in the financial markets.

In general, risk management is distributing a good number of different cryptocurrencies within your portfolio. It is a great measure to limit your exposure to price fluctuations within the market.

A combination of technical and fundamental analysis can determine the asset while ensuring more significant chances of success in a specific investment while minimizing risk.

And to achieve this equation, you need a plan.

Creating a successful risk management plan is critical to minimizing unexpected negative consequences that lower your total losses.

How to calculate the proper Position Size (in instrument ratio)?

An example of calculating Risk for a trade with a deposit of $10,000.

1. Risk 1%. $10,000*1%=$100. If you are ready to Risk more – replace 1% with your comfortable Risk.

2. If the position that you will enter BTC at is $10145, the Stop Loss is placed at $9000, 11,28% lower than the Entry point. If Stop Loss will be triggered, your loss will be $1145. Don’t confuse Risk and distance from Entry to Stop.

3. Calculating the position size/order size for 1% Risk.

$100/1145 = 0.08734 (in BTC)

3.1. For a trade you will use 0.08734*$10145 (Entry point) = $886.06 (In Dollars)

4. Ready-check for Stop Loss:

0.08734*9000=786.06. Entered for $886.06, got back 786.06. In the end 886.06-786.06=$100 (1% risk from $10,000).

By reducing the Stop Loss (in fact, reducing the distance between Stop Loss and Entry) position size is increasing.

We recommend you use an excel formula to decrease the time of calculating and make it possible to calculate both Long and Short positions. Signup to our newsletter to get the excel and recent updates on everything hot in the crypto market.

Live examples:

Long scenario

Let’s take the recent BNBUSDT trade.

The instruction says that I need to risk 1% of my capital in this trade.

Let’s imagine that the average person has $200 capital.

I decided that my Risk = 1% which is equal to a $2 loss if Stop Loss hits.

To defend my capital from the bigger loss I need to calculate how much BNBUSDT I should buy to fit the 1% risk.

I go to the Excel/Website and put all the parameters into the sections and it counts how much BNBUSDT should I buy.

How to calculate the instrument amount manually?

Risk 1% from my deposit is $2. This is NOT the MARGIN. This is the amount that I will lose if Stop Loss hits!

Calculating the Stop Loss tolerance:

Entry – Stop Loss / $511.60 – $483.930 = $27.67.

Stop Loss is placed $27.67 lower.

Calculating the instrument amount:

$2/$27.67 = 0,0723 BNB should be bought to fit the 1% risk.

How to calculate the dollar value to enter?

Instrument amount * Entry / 0.0723 BNB * $511.6 = $36.99 – this is dollar amount for the BNBUSDT trade.

How much leverage to take?

No actual answer to this question but…

The perfect setup is when you have cross leverage and no more than 6 positions at a time with the free margin to cover your Liquidation price.

*read the Cross Leverage definition here -Binance Cross Lev education link-*

Leverage is not increasing your profits until you go beast mode with the maximum leverage.

But when you do this – your liquidation price is very close and the chance to win is around 5% from 100%.

Leverage allows you to buy a bigger amount of the instrument than you can buy with the initial deposit of $200 as an example.

If I do x20 leverage then I am allowed to buy coins for $200*20 = $4000 but the liquidation price will be so close that every small movement will liquidate my deposit.

That’s why before choosing a multiplicator of the leverage you need to calculate the Risk!

Whaletank Team

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