Money management and the Risk/ Reward ratio are two very important factors affecting your crypto trading. By implementing proper strategies, and R/ R you can survive in the crypto market for a longer period.
What is Money Management?
Money management is a strategy for increasing or decreasing the position size to limit risk while achieving the greatest growth possible from a trading account. There are good and bad ways of implementing money management, and the right way focuses on both the risk and reward factors on your account. It allows you to leverage the account while balancing risk. Money management can be used when trading any market as it is focused on one thing alone, and that is account performance.
What happens when you don’t manage your money?
The first thing you might be doing is risking more than you can afford to lose. Since the crypto market is highly volatile and almost half of the projects don’t have any legitimacy; hence you should always keep track of where your money is going.
Furthermore, it is also important to maintain to manage risks and rewards. However, you should also keep track of the fees a crypto exchange charges you. For example, you’re investing $1,000,000 at two different exchanges. One of them charges a fee of 0.1% and the other charges a fee of 0.5%.
- For 0.1%, the total trading fees will be: $1,000
- For 0.5%, the total trading fees will be: $5,000
That’s a total of $4,000 that you’ll be paying for the second exchange. So always keep the fees pay you in check. Therefore, if you don’t keep track of where your money is going, you’re basically losing more than you have to.
Manage Your R/R (Risk and Reward ratio)
Many people face problems in growing their portfolio size over time. It is simply because of the lack of knowledge about risk management.
Professional investors use the R/ R ratio (Risk to Reward ratio) to have a clear image and keep themselves out of too much confusion. Keep it simple, for example, if u want a reward of 3% then you should take a risk of 1%.
Furthermore, your R/ R should be 1/3 in which risk is 1% and reward is 3%. This way for example if you have taken 10 trades and 5 out of them have hit their stop loss at 1% loss and 5 out of it have successfully hit their T.P at 3% profit. Overall, you are still in profit if you calculate it perfectly. In total, you are 5% in loss and 15% in profit. So 15% profit minus 5% loss. Still 10% profit!!
However, you should always try not to take a loss on your trades, as if lose money on a trade then you lose more than you realize (loss in capital + trading fees).
Also read, 12 Golden Rules to include in a Trading Strategy.
What can you do to prevent these losses?
The first and most important thing to do would be to apply proper risk management strategies. Moreover, if you are not familiar with such terms and are still learning, we are here for you.
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