Risk management is the cornerstone of every successful trading strategy. Prior to risking any real capital, you need to determine your financial goals and the amount that you are willing to risk to achieve your goals. It’s important to understand that you get paid to take risk. The more risk you take, the greater the potential reward or loss. When you trade crypto currencies, you want to define your risk at the portfolio level, the strategy level, and the trade level.
What is Risk Management?
The definition of risk is the amount that you potentially could lose in your trading endeavor. It’s not the actual loss, but what you could potentially lose. Risk management is the process of mitigating the risks you take. The goal of every trading strategy is to make more than you lose, to generate a profitable strategy. Nearly all strategies lose money at one point. What is important is that you expect that there will be loss, and the losses that you experience are in line with the strategies you employ.
How Do You Create a Risk Management Profile?
To create a risk management profile, you can start by determining your financial goals and determine how much money you need to risk meeting those goals. Remember, trading is not gambling. You need to have a realistic ‘risk versus reward’ profile to make money successfully. You can start by determining how much capital you are willing to risk and what percent you are willing to lose. For example, you might have $5,000 of discretionary income that you are willing to risk. Of that $5,000 you might be willing to risk $1,000 to make $3,000. If your goal is to make $3 for every $1 you risk..
Strategy Risk Management
For example, if you are using a short-term scalping strategy, where the amount you risk equals the amount you gain, you would need to win 75% of the time to make $3 for every $1 you risk. If you are using a trend following strategy you might have made more on each trade that is a winner than you lose on each trade that is unsuccessful. In this instance, you might make $3 on each winning trade and lose $1 on each unsuccessful trade, while only winning 50% of the trade you transact.
Risk Management on Each Trade
The last step is to employ your iFOREX risk management on each trade. Prior to transacting a trade, you should have a good idea of where you will take profit and where you will need to stop loss. You might have a trailing stop loss on each trade.
Risk management is the key to a successful crypto currency trading endeavor. Risk is defined as the potential loss you could experience. You want to create a risk management profile that evaluates risk on the portfolio level, the strategy level and on each trade. Once you have a plan in place, you need to adhere to the plan which will help you achieve your financial goals.