Risk Management

How not to blow up your account.
The key to success is your ability to make many mistakes and still survive. This is where risk management becomes a really important piece of your trading strategy. There's numerous ways that you can apply risk management, some of which will be covered in this article.

Position Sizing

To get started with position sizing we first need to take a look at our overall risk percentage. The accepted number generally lies somewhere around 1%. But what does this mean? Let’s clarify with an example. Imagine that you have a total trading portfolio size of 1 BTC and apply a risk percentage of 1%. This means that you are comfortable losing 1 BTC * 1% = 0,01 BTC on each trade you take.
So how does risk percentage factor into your trading? By simply following this rule it means you never risk more than 1 percent of your entire account value on a single trade. This significantly lowers the risk of blowing out your entire portfolio on a trade that’s gone south. However, that doesn’t mean that you’re only trading with 0,01 BTC for each trade!

Example trade

A few things factor into how big your position size can be once you’re applying the 1% risk management factor: your entry price, your stop loss price and your overall trading portfolio size. Let’s run the numbers in the following fictitious example and you’ll see how it works:
  • Total portfolio size: 0,1 BTC
  • Entry price: 0,00001200 BTC
  • Stop price: 0,00001100 BTC
  • Risk percentage: 1%
Using the following calculation we can figure out how much of a position we can take to ensure that we only lose 1% of our portfolio if our stop loss is hit:
Let’s do the math using the example above:
((1/100)*0,1) / (0,00001200 - 0,00001100) = 1000 units
So we can buy a 1000 units at 0,00001200 sats each, meaning we can spend 0,012 BTC in total for this trade. That’s over 10% of our portfolio! If we move our initial stop loss up to 0,00001150 and apply the same equation we are able to spend a total of 0,024 BTC. As you can see moving the stop loss has a big impact on what we can spend while keeping the same amount of risk. Keep in mind though that it also increases the chance of getting stopped out on a trade.
Applying risk management and consistent position sizing is key to becoming more profitable. Not being able to take bigger positions while keeping a low risk level is a common misconception that many people starting out come across.

Trailing stops

The TrendMaster strategies encourages users to make use of a trailing stop. This is another method of applying risk management to your trades. A trailing stop is a variation on a normal stop loss order where you let the trailing stop climb along with the trend. A trailing stop only moves in the direction of the trend you're trading so if you're in a long it can only go up and if you're short it can only go down. This means that once trend direction changes significantly you will be stopped out in a timely fashion.

Advantages of trailing stops

One of the advantages of trailing stops is you are locking in small amounts of profit as long as the market is moving with the prevailing trend. It also ensures that the risk on your position doesn't become too big since you're tightening your stops regularly. When using a normal stop loss the risk on your position will increase as your profits increase since you're not locking in that profit.

Where do I put my trailing stop?

The TrendMaster system provides a few different methods of putting a trailing stop in place. All of these are described in more detail in the TrendMaster section.