Trading cryptocurrency has become very popular. Many individuals trade with the goal of generating consistent and profitable returns. Achieving these returns requires discipline. A key reason for success is strict risk management. Proper risk management often makes the difference between consistent profits and losing capital. In this article, we will explore some popular risk management techniques you need to use in your trading.

Stop Losses and Take Profit Targets

The first risk management technique for crypto traders is setting stop loss and take profit targets. Stop losses are important because they limit your potential losses if a trade goes against you. Similarly, take profit targets are vital as they lock in any profit you make when a trade moves in your favor.

A lack of a stop loss or take profit targets can very often be problematic for traders. For instance, if no stop loss is placed, there is a distinct possibility that a trader will be unwilling to close a losing trade because he or she believes that it will rebound in their favour. Crypto trading bots and signal groups (e.g. crypto signals) are useful tools in allowing traders to place their stop loss and take profit target before getting into a trade.

Position Sizing

Another important risk management technique all traders should be using is position sizing. The concept behind position sizing is that a trader shouldn’t risk 100% of their trading account on any one trade at a given time. This is to prevent a trader from blowing up their account and drastically reducing their capital balance if a single trade was not to work out in their favour. Instead, a trader should be using a fixed percent of their balance, e.g. 1%. This adequately allows the trader to properly manage their risk as they fan focus on generating consistent returns as opposed to worrying about losing the entirety of their account balance.

Risk/Reward Ratio

Understanding the risk/reward ratio before placing a trade is vital for success. If a trader knows the expected return compared to the risk, they are more likely to choose trades with higher chances of success. Over time, this helps generate a net return by focusing only on trades with favorable risk/reward ratios.

The formula for calculating risk/reward is as follows:

(Target – entry)/(entry – stop loss)

You can also use the below as a rough guide for determining the risk to reward of a trade:

• 1:1 is breakeven
• 1:2 is great to trade
• 1:3 is even better and is a perfect ratio

Anything less that a 1:1 risk/reward ratio is considered to be an unfavourable trade and is generally not advised.

Conclusion

Risk management is very important in becoming a profitable trader, and as a result, it should be taken seriously by those who are new to trading. These are just some of the ways good traders are ensuring they make a return as opposed to a loss at the end of the month.