In this article, I will explain the basis of risk management, how to trade in PnL (Profit and Loss) and how to read our trading results at 4C-trading.
One of the most important aspects of trading is risk management. No trader is capable of doing only winning trades and that is completely normal. What matters in the end is to have a winning Risk/Reward (greater than 1) strategy. And above all to manage your trades with good money management.
A trader is not just someone who performs good technical analysis. He is also a very well organized person with a good sense of psychology. By organized, I mean methodical, and conscientious with a well-established strategy.
Here we will see how to manage your risk.
Which risk to choose?
- Very low risk profile: 0.5% — 1%.
- Average profile: 1%.
- Risky profile: 2% — 3%.
- Very risky profile: >3%.
Note: This is a percentage of your trading capital, not your TOTAL capital for cryptocurrencies. Remember to make a clear distinction between your trading and investment capital.
What does risk correspond to? This is the maximum amount you allow yourself to lose if your trade hits a stop-loss.
Let’s move on to a practical example on the PnL risk:
Let’s imagine I have a trading account of 10 BTC (again we’re talking about capital only for trading here, I insist, but that’s important).
If I take a 1% risk, it means that at my next trade I can lose a maximum of 1% x 10 = 0.1 BTC.
If for this trade my stop-loss is at 10% and it is reached my loss will always be: 0.1 BTC. I will therefore have 9.9 BTC left on my trading capital.
The question you may have is why put a stop loss then? Why not leave the position until the liquidation price? Because from the stop loss we will be able to determine the size of our position on the trade. So, if my stop-loss is at 10%, how much will be invested in the trade?
The amount invested will follow the following formula :
In our example, the capital invested will therefore be: 1 BTC.
(10 x 1%)/10% = 1 BTC.
In this situation: you trade for 1 Btc of your trading capital. If your Stop-Loss is reached, you lose 0.1 BTC.
Let’s imagine this time that the stop loss is at 5% what will be the capital invested?
Amount invested = (10 x 1%)/5% = 2 BTC.
In this situation: you trade for 2 Btc of your trading capital. If your Stop-Loss is reached, you lose 0.1 BTC.
Now let’s imagine that you trade with a leverage x5 and the same parameters as in example 1:
The amount invested will remain the same as in the first example:
Amount Invested = (Capital x Risk)/Stop = 1 BTC
But this time instead of having 1 BTC of the 10 BTC of your trading capital, it will be 0.2 BTC of your trading capital that will be used.
In this situation: you trade for 1 BTC on the platform which corresponds to 0.2 BTC of your trading capital because you use a leverage at x5. If your Stop-Loss at 10% is reached, you lose 0.1 BTC.
What is the point of leverage? It allows you to bet more than your capital or to maximize the number of simultaneous positions.
At 4C-trading, thanks to our Auto-trade integrated in our bots, you only have to enter your risk, and we will do the rest.
The Risk Reward R/R:
This is a ratio used to evaluate the profit potential of a transaction in relation to its loss potential.
The ratio is calculated as follows:
- The loss potential is the price difference between the entry point and the Stop-Loss order.
- The profit potential for the transaction is the price difference between the target and the entry point.
If the RR is greater than 1, this means that the gain potential is greater than the loss potential.
Ideally, in order to build an optimal trading system, you will always seek to have an RR >1.
I hope that with this article you have learned new things and understood the importance of trading in PnL risk.
Nico, trading analyst 4C-Trading.
Warning, these are estimates and it is obviously necessary to monitor the information concerning this project. This is a trading plan and not a prediction. Invest only what you can afford to lose.
Binance : https://www.binance.com/fr?ref=35970607