Crypto Swing Trading Summary (C5): Risk Management

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When it comes to swing trading, proper risk management is what will make or break you.

This is even more true with crypto due to the volatility.

Create a risk management plan and stick to it no matter what. Push through all the FOMO, fear, and greed. Risk management is king.

Position sizing refers to how much money you invest into any single trade.

Your trading capital is how much you have for trading in total.

A good rule of thumb is to never risk more than 2% of your trading capital.

For example, if you save up $1000 to start trading, then $1000 is your capital.

1% of $1000 is $10. This doesn’t mean you will trade $10. Rather, it means that you can risk a loss of $10.

To calculate your position size you must first know your entry point and stop loss. The difference between the two is your risk per coin. If you buy a coin for $10 and your stop loss is $9, then your risk per coin is $1.

You can risk $10 in total, which means you can buy 10 coins.

Setting a minimum risk reward ratio ensures that every trade you make has the potential to yield more than you risk.

A 1:2 risk-reward ratio is a good minimum. This means that if you invest $100, and your stop loss is at $90, then you expect to cash out at least $120.

By doing this, even if just half of your trades are successful, you will still come out on top.

Diversification is when you invest in multiple assets so you don’t have all your eggs in one basket.

This way, if one of your investments flops, you don’t lose everything.

In crypto, this might translate to holding multiple tokens, as opposed to, for example, just Bitcoin.

A good rule of thumb is to never invest more than 20% of your crypto trading capital into any single coin.

Even if you do this, the movement of big players, such as Bitcoin, can affect many altcoins also. For further diversification, seek out less connected assets.

You should also keep some of your capital in cash or stablecoins. This will allow you to capitalize on unexpected opportunities.

A drawdown is when your investment value drops from its highest point to a lower point.

In crypto markets, drawdowns can be unpredictable and severe.

To combat this, you can set specific points at which you will reduce your position size or where you will exit a trade, or the market, completely.

For example, if your account has a total drop of 20% from its peak, then you will cease trading.

Creating a risk management plan is relatively easy.

Sticking to it is the hard part.

It is always tempting to shift your stop loss just a little further away in hope that a failing investment will turn around.

Or to buy a coin due to FOMO even when its price increase exceeds your acceptable risk/reward ratio.

You absolutely must not do these things under any circumstances.

Your risk management plan is like your bible for trading. It is true that sticking to it religiously may mean you miss out on some profits, but, in the long run, it will save you from being wiped out.

If you break the rules in your plan “just this one time,” then it is much easier to do it “just one more time.” Do this enough times and you are gambling.

This doesn’t mean you can’t adjust your risk management plan. But don’t do it on the fly to accommodate a specific trade. Instead, adjust it only if you genuinely find a better way to do things after learning from experience. Then apply this updated plan religiously.

Read the next chapter here.

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