If you want to survive in this world, building a strategy to manage your money when you're dealing with crypto-currencies should be your top priority.
Today, the level of interest in bitcoin and company is at an all-time high. Even the mainstream media cover this market's day-to-day variations, increasing the pressure on both owners and potential buyers. Unfortunately, a majority of first-time investors only fully grasp the consequences of a bad trade the hard way, after they've already let themselves be get carried away by hype and inexperience. At that point, turning things back the way they were becomes extremely challenging. You'll have to repay your own losses and eventually start from scratch when you're ready to give it another go.
To successfully manage assets as volatile as crypto-currencies, the value of which can deeply change in a matter of days, you should do your best to avoid both greed and fear. Instead of blindly trying several combinations until you find one that works, take a step back and study the situation. As each currency is slightly different from the previous one, doing some research is always beneficial.
Additionally, you might want to have a plan that covers all possible outcomes. Even before you start trading, note down how much you're dedicating to the endeavor and make sure you can actually afford the expense. Define your goals, decide how you're to re-invest your profits and, above all else, always have a bomb-proof way to pull the plug if things go south.
A general rule of thumb is never risk more than 1-3% of your balance on any single trade. Some may go as high as 5%, but keep in mind, if you are wrong 20 times at 5% your funds will be wiped out. At 1%, you can lose 100 times. Keep in mind you will also make less, but at least starting off, don’t go too high here.
What Is a Risk to Reward Ratio?
Among professionals, having a complete understanding of the risk to reward ratio -also known as RRR or Risk/Reward - is often considered paramount to the success of any given investment. In layman's terms, this number is used to understand how profitable or damaging a transaction could be to them. Consider it a market analysis of sorts, which takes place before any real money's involved.
Just like if we were trading stocks, the risk to reward ratio can be calculated using a rather simple formula. Before we move to that, though, we'll need to define two other variables for our crypto-currency. These are the currency's stop-loss value - which is the threshold below which the currency should be sold if its monetary value drops - and the investor's profit target; the amount the price should grow by before we're willing to sell.
Now that we have all data, we can finally crunch it to find the value we're actually after. Simply take your currency's purchase price and subtract your stop loss value to obtain the risk. Write this number down and do a similar operation with the other two to find the reward, subtracting your profit target from what you paid to acquire the currency in the first place. Finally, divide your risk by your reward to find the ratio.
Although all trades are somewhat dangerous, the RRR can give you a pretty solid idea of how smart an investment would be. Any value below 1 means that you could potentially get a return out of your expenses; anything above that should warn you to look for something else.
What Are Stop-Limit Orders?
The world of trading, whether it involves stocks, crypto-currencies, or physical goods, is always dominated by strategy. In an effort to minimize losses and quickly recuperate from potential price drops, as well as to fully exploit any upward trends, traders have devised the so-called stop-limit order. By defining specific thresholds, this tool allows them a larger degree of control over their commodity, letting them choose exactly when to buy or sell their goods.
In order to put a stop-limit order in place, you will first need to specify both the value to which the price should drop before the order is triggered – the stop – and the amount it should jump up to before the transaction is executed: the limit. A time-frame should also be involved, after which the order is to be considered void if the currency hasn’t reached its limit yet.
Even though stop-limit orders are designed to decrease risks and maximize revenue, their use doesn’t make trading crypto-currency a 100% safe endeavor. If the currency you’re after turns out to be too slow to recover, some of these orders might never be actually triggered. Were it to happen, such a scenario would leave you with a heavily depreciated commodity that you can’t plausibly hope to profit from in the short run.
What Is Leverage in Trading?
Still one of the most discussed concepts in the whole world of trading, the definition of leverage is often blurry for many. At its core, this approach allows investors to maximize their purchasing power, as well as the size of the packages they can trade, by loaning money from a third party. Brokers are usually the main source of credit when it comes to leverage, while the investor’s own funds will be used to cover any collateral damage.
Despite it remains commonly used throughout all branches of the Forex market, leverage is often considered a rather dangerous way of conducting your business. Loaning large amounts from a broker to move a bigger quantity of goods might boost your potential revenue, but will also leave you with huge debts to pay if the transaction doesn’t quite go as you planned.
This is why most brokers will ask that you open a so-called margin account with them. Depending on the degree of leverage they’re offering – usually either 50:1, 100:1 or 200:1 – you will need to deposit a specific amount of money into the account before you conduct business with these people. This will act a guarantee; a failsafe of sorts to ensure that at least a part of the total sum is recovered.
Finally, in order to further minimize the risks both for the broker and for the investor, other methods might also be adopted. These often include particularly strict trading rules which, among other things, heavily rely on the aforementioned Stop-Limit orders.
Source of Information
https://cryptonewsletter.co/article/3/