Rule #3 | Have a Maximum Risk per Trade of 2%
In my last post, my 11 Groundrules for Trading, I said I risk 2% of my cryptocapital per trade.
This post is an elaboration on that.
If I start with $10,000 and I lose 100 trades of 2%, I will still have $10,000 x (0.98^100) = $1326.20 left. This basically means that as long as my risk to reward ratio is more than 1:1 and I win at least 50% of the time, I will make profit in the long run.
If my risk per trade was 10% I'd be left with $1215 after 20 trades already. The reason I chose 2% is because it's the most I feel comfortable losing in a trade right now and because I can be wrong lots of times without it being a big problem for my account.
How do I calculate this risk?
In the beginning I used to get my calculator out for every single trade. This took up way too much time. Why go through all that trouble when I can just make an excel sheet with some formulas. So I did.
Side
Are we betting on a price increase (long) or a price decrease (short).
Capital
My total invested capital in crypto in USD.
Available
My total available capital in crypto in USD. It's my capital minus what is already invested into crypto.
Since I trade, I get in and out of trades. This means that most of the time I have coins and USD at the same time.
Spread
The average difference between the bid and ask price for that coin.
Entry Point
The price at which I want to get into a trade.
Stop loss
2% stop loss
When it hits this price, my expectation of what the price was gonna do, was wrong. The amount of that particular coin (in the example above it's 615 EOS) will be sold at a small loss.
4h structure low
Even though the short term trade may have failed and the price dropped when I thought it was gonna go up, I still may be right. Maybe the pullback was just a bit bigger than expected and after it dropped it bounced and went up a lot. This is why I also have a stop loss below the a big low on the 4h chart.
long term
Long term investing. Will only sell when I see a bearmarket coming
Coin (EOS)
The amount of the coin that I will sell at the chosen stop losses.
The total is the amount of the coin that I will buy at the Entry Point.
Risk
The amount of USD that I will lose if all stop losses get hit.
When all my stop losses get hit at the calculated sizes I will lose 2% of my total crypto capital.
I fill in my capital, available capital, entry point & the stop losses. The calculator will then calculate how many coins I should buy and how many I will sell at the certain stop losses to lose a maximum of 2% of my capital invested in crypto.
DISCLAIMER
The information in this post is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any particular purpose. The Information contained in or provided from or through this post is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice. The Information in this post and provided from or through this post is general in nature and is not specific to you the User or anyone else. You should not make any decision, financial, investment, trading or otherwise, based on any of the information presented in this post without undertaking independent due diligence and consultation with a professional broker or financial advisory. You understand that you are using any and all Information available in this post at your own risk.
RISK STATEMENT
The trading of bitcoin or alternative cryptocurrencies has potential rewards, and it also has potential risks involved. Trading may not be suitable for all people. Anyone wishing to invest should seek his or her own independent financial or professional advice.
Cryptocurrency trading/investing involves substantial risk of loss and is not suitable for every investor. The valuation of cryptocurrencies may fluctuate, and, as a result, clients may lose more than their original investment.
All trading strategies are used at your own risk.