Money Management: How To Apply Risk Management On Crypto Trading
Money management is vital and fundamentally important for traders, either they trade cryptocurrency or binary options. The financial market is unpredictable, and you will badly lose your investment if you ignore the risk management strategy.
If you are like other traders and initially got into cryptocurrency trading in 2020, you may also need to read this article. As the crypto market is booming, we found many traders are trading Bitcoin with limited knowledge.
Besides the technical analysis and fundamental analysis, money management is also necessary.
The technical analysis refers to trading tools. Using this tool, traders find trading opportunities by analyzing statistics and other metrics. To keep updated on global news and events, you will need fundamental analysis. Similarly, in money management, you need to change your trading perspective.
We have chosen to make this article on money management after analyzing crypto trader’s difficulties.
What Is Money Management
Money management is a rule that helps investors to develop a plan. It is a process of managing money before investing.
It is also known as investment management or risk management. Additionally, it is mandatory to know which trading asst will give you the highest return in terms of price movement, trading time, and trading budget allocation. Remember, each step will help you to cut down your losses.
The Chinese military general Sun Tzu’s famously said that –
Every battle is won before it is fought.
So, you need a proper plan and strategy to win a trade. From finding out the right trading broker to placing an order, traders must have to follow a 2% money management rule to maximize profitability.
The 2% Money Management Rule
So, the question is how do you maximize your profitability without blowing up your account? And the answer lies in the 2% money management rule.
Investing a random amount in trading is quite similar to gambling. Allocating an amount thoroughly after analyzing a market is a form of investment. It is widely accepted that once should never invest more than 2% of his available capital on a single trade.
Let’s say you have $5,000 to invest and you’re considering a particular trade with a hit rate of 60%. If you invest the whole $10,000 you have a 60% chance of doubling your money but at the same time, you also have a 40% chance of losing.
On the other hand, let’s say you split your $10,000 into two and invest $5,000 each. Your probability of losing from two investments is only 16 % or 40% which means your chances of losing everything are much less.
Furthermore, if you split the capital into ten, $1,000 each your odds of losing everything would drop to just 0.01%.
Apply Risk Management On Crypto Trading
Just like other forms of trading, Crypto trading also requires proper risk management. However, we have already mentioned the 2% rules above. To find out the risk, traders have to multiply the risk percentage with the initial investment amount.
Suppose you have a $500 account and you want to risk 5%. So the calculation is
$500 * 5% = ($500*5)/100 = $25
In other words, you will open a position with $25 and that’s the amount you will risk. The risk percentage will change according to the capital and strategies.
Money Management For Cryptocurrency Traders
If you are good at trading crypto, then it can be lucrative for you. It is an opportunity to work from home or from anywhere. For both manual and automated trading, money management rule is necessary to follow.
In one sentence, you are just managing your risk from the volatile financial market. Every professional trader uses this word money management when talking about bitcoin or other crypto assets.
The below points are mandatory to follow by crypto traders:
- Use a small percentage of your capital for each trade
- Plan for an estimated trade duration
- Position size
- Don’t fear of losses
- Knowing the risk and reward ratio
- Create a trading plan
- Get trading market updates and monitor wisely
Advantages Of Money Management
A trader may find a balance between the potential profits and loss. You have a small chance to make money if you don’t apply the money management rule. Moreover, you can only make a successful trading plan by following a rule book.
There are some noticeable advantages available in the money-management rule. These are:
- Prevent traders from extra trading loss
- Reduce trading risk
- Increase the opportunity of the investment amount
- Eliminate trading emotions
Whether you are a professional trader or not, a profitable trading plan is essential. It is the best tactic to get your finance under control. On the other hand, the strategy will help you to get the most return on your income.
Moreover, it is a key concept that most novice traders should understand and learn to apply. Unfortunately, traders overlook this topic and only concentrate on figures. But in reality, trading has nothing to do about gambling.
As a trader, you are not looking for a jackpot. So, stop blaming your luck!