The first step to becoming a profitable Bitcoin trader is following a disciplined approach to risk management. In this guide, Crypto Briefing outlines some risk management tactics that will go a long way in boosting profitability.
No Reward Without Risk
Risk and reward are two sides of the same coin.
But every trader – retail or institutional – has a risk appetite that is defined by various parameters, such as the size of one’s investment corpus, income levels, age, and other factors.
Knowing how to evaluate your risk profile is the cornerstone of managing risk.
Taking on risks that are beyond one’s threshold is a recipe for disaster. Losses can compound quickly, wiping out whole trading accounts.
This happens far too often – especially in crypto.
Copying the risk management parameters of traders on social media can also devastate trading accounts. This only makes sense if one has a similar background and risk threshold as the trader they’re imitating.
A trader whose standard position size is $100 cannot emulate the risk management of a trader who actively opens $100,000 positions.
Without risk management, it’s impossible to become profitable. This is because profitable traders let their winning positions roll and cut their losses early.
In this guide, Crypto Briefing will lay out a basic framework for managing risk.
Establishing Risk Management
Position Sizing and Stop Losses
Trading is all about minimizing losses and maximizing wins. That said, the process is more of an art than a science, varying from person to person.
But the first rule of risk management is to ask oneself: How much of a loss can I afford to sustain on a single trade?
Typically, it is recommended that one limits the risk per trade to 1-3% of their total trading account.
This concept, however, is subject to widespread misinterpretation.
Some sources incorrectly claim this means you should enter every trade with a position size that is 1-3% of your total portfolio. But it actually means that you should be willing to put 1-3% of your equity at risk.
For example, if Alice has a $1,000 trading account, it doesn’t mean her notional position size should be $10-30; it means she should be willing the lose a maximum of $10-30 on each trade.
But how do you ensure you limit risk in this way?
A trader can ensure their loss per trade has an upper limit when they employ a stop loss.
Stop losses shouldn’t be placed arbitrarily. Instead, one should place it at the point where their trade idea is invalidated.
Say the price of BTC is $9,500, and Bob believes there is room for more upside, but if BTC goes to $9,280, the market structure turns bearish, and this idea is invalidated. Now Bob, whose trading account is worth $25,000, previously decided he will risk no more than $250 per trade.
So, Bob will buy one BTC at $9,500, placing a stop loss at $9,250, thereby limiting his maximum loss to $250 ($9,500 – $9,250).
But why does Bob place it $30 below his invalidation level?
Because when a certain level looks like the point of invalidation for many market participants, whales will run price just beyond that level to source liquidity and direct price in the opposite direction.
This is just an extra step for precaution in hyper-volatile crypto markets.
An underrated aspect of risk management is ensuring one only takes trades where the reward-risk ratio is favorable. In the absolute worst-case scenario, the reward-risk ratio should be one where the potential gain is equal to the potential loss.
This means if a trader is risking $10, the minimum profit from the asset reaching their target price should be $10.
Trades with a reward-risk below one make no sense because the trader stands to lose more than they can ever gain.
To supplement this, some traders have a minimum reward-risk that is much higher.
By only taking trades where the reward-risk ratio is, say, three or higher, traders can ensure they only risk their capital when the potential payout is two orders of magnitude higher.
Building a Dynamic Plan With Experience
Each trader will employ different styles of trading that have varied merits and drawbacks.
After an adequate amount of time staying disciplined with strict rules, traders can start to mold their risk parameters around their strengths and weaknesses.
Some may start to employ a trailing stop loss because their ability to locate profit-taking zones is inferior, and others might increase/decrease the risk they take based on the reward-risk ratio.
The bottom line is that there is no one size fits all risk management and trading framework. Each individual is tasked with setting their own risk parameters and adjusting until they find a working system.
Employing disciplined risk management is the first step to trading profitability.
Market Analysis Report (23 Oct 2020)
PayPal Reportedly In Talks to Buy BitGo, Other Crypto Firms | 98% of Unspent Bitcoin Transaction Outputs Currently in a State of Profit | Paxful Repelled 220,000 Bot Attacks in Two Months
98% of Bitcoin’s unspent transaction outputs (UTXOs) are currently in a state of profit, a level that hasn’t been seen since December 2017, when the price of bitcoin hit its all-time high close to $20,000.
Data shows high levels of bitcoin unspent transaction outputs in a state of profit were typical in previous BTC bull markets, which could indicate a local top is near. The last time BTC’s UTXOs were above 90% was in July 2019, when the price of BTC hit a $13,900 top before a sell-off saw it drop to $7,500 by October of that year.
An unspent transaction output, it’s worth noting, refers to bitcoin remaining after a cryptocurrency transaction was executed, similar to the change received after conducting a cash transaction at a store.
Bitcoin Increases But Struggles to Sustain Prices Above $13,000
On Oct 23, Bitcoin (BTC) continued the upward move which had accelerated on Oct 19. While the long-term trend is likely bullish, a short-term drop could occur before the price resumes its upward movement. Bitcoin Continues Ascent On Oct 23, Bitcoin continued its upward movement by creating another bullish candlestick that was slightly smaller than […]
The post Bitcoin Increases But Struggles to Sustain Prices Above $13,000 appeared first on BeInCrypto.
On Oct 23, Bitcoin (BTC) continued the upward move which had accelerated on Oct 19.
While the long-term trend is likely bullish, a short-term drop could occur before the price resumes its upward movement.
Bitcoin Continues Ascent
On Oct 23, Bitcoin continued its upward movement by creating another bullish candlestick that was slightly smaller than the candle that preceding it. Furthermore, yesterday’s wick-high of $13,208 was lower than that of Oct 22, which reached $13,235.
Despite this development, there is no visible weakness in the daily time-frame. The MACD, RSI, and Stochastic oscillator are increasing and there is no bearish divergence present.
The short-term chart for BTC does show some signs of weakness, however. On Oct 21, BTC created a shooting star candlestick (blue arrow in the image below), which was the first bearish sign during the upward move.
Yesterday, the increase that failed to reach the previous high was combined with significant bearish divergence in both the RSI and the MACD, the latter of which has almost crossed into negative.
The Oct 21 high might have marked the top of the third sub-wave (shown in blue below), which is a part of a larger third wave (orange).
Considering the short-term bearish implications from the previous section, a retracement is expected. Even though there are no clear support levels below the current price, we can use Fib retracement levels to determine where the retracement will most likely end.
The price could drop to the 0.382 Fib level of sub-wave 3 at $12,125. The reason for this shallow retracement is a counter to the deep retracement of sub-wave 2, which went all the way down below the 0.618 Fib level. Because of the concept of alternation, we would expect to see the opposite in sub-wave 4.
To conclude, while it is likely that BTC is bullish in the longer-term and will move higher, a short-term retracement is expected before the price resumes its upward movement.
For BeInCrypto’s previous Bitcoin analysis, click here!
Disclaimer: Cryptocurrency trading carries a high level of risk and may not be suitable for all investors. The views expressed in this article do not reflect those of BeInCrypto.
The Best Place to Short Bitcoin is Above $14K, Analyst Explains Why
Bitcoin bulls will enjoy domination over the market until its price breaches the $14,000-mark, according to Eugene Loza of EXCAVO.
The independent market analyst wrote in his note to investors that he expects to see traders with more exposure in Long trades than the Short ones. He signified his prediction with a technical structure. It envisioned BTC/USD inside an Ascending Channel pattern, inching upward as it awaits to test a sequence of Fibonacci resistance and support levels.
The smaller Fibonacci retracement graph in the chart above expired at $12,283 after Bitcoin breached the level on Wednesday. Simultaneously, the cryptocurrency closed in towards the 61.8% level – at $13,037 – of the bigger Fib setup, awaiting a breakout move to the upside.
An $11K Bitcoin Possible
Mr. Loza supported the outlook of an extended bullish move, noting that $13,037 is “not the best place for a short [position].” He added that those who are still trading against Bitcoin’s upside outlook would risk getting liquidated at around $13,350 at a loss.
That would leave Bitcoin with the possibilities of moving further higher towards the 78.6% level of the big Fib. That is around $15,728.
Mr. Loza said that opening a short position anywhere between $14,000 and $15,728 is a “better” call. The range also lies near the upper trendline of the Ascending Channel pattern.
“Once we take the target, there is a possibility of correction to the middle line of the ascending channel,” Mr. Loza added.
The mid-level is below $11,000.
More Downside Outlooks
Mr. Loza’s statements came amid a period of strong buying enthusiasm for Bitcoin. The cryptocurrency this week gained global recognition after PayPal, the world’s leading payments service company, announced to integrate it in its existing line of products.
Before PayPal, its top rival Square, a firm headed by Twitter CEO Jack Dorsey, had shown $50 million worth of BTC in its balance sheets. Another recognized corporation, MicroStrategy, also reallocated $425 million of its cash reserve to Bitcoin, citing its fears of US dollar devaluation amid rising M2 and ultralow interest rates.
Traders assessed the sequence of events as validation of Bitcoin’s growth among prominent firms, both as a service and a financial asset. As a result, the Long positions on BTC/USD jumped dramatically higher than the Short ones, validating that the majority believes Bitcoin is underpriced at current rates.
Michaël van de Poppe, another independent market analyst, showed caution towards overly bullish statements. He said Bitcoin should hold the $12,750-12,800 range to sustain its upside bias. Otherwise, the cryptocurrency risks plunging “towards $12,200 and potentially $11,900.”
Mr. Poppe’s medium-term outlook, at the same time, projected an upside continuation towards $14,000. He nevertheless reiterated that “the area between $11,200-11,700” would serve as support.
“In the worst-case scenario around $10,000, but everything is clear and good here,” he added. “Breaking $13,600 area and I think $16,000 is next.”
That somewhat rhymed with Mr. Loza’s prediction of the cryptocurrency.
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