Navigating Risks: 
Essential Strategies for All Levels

Risk Management

Position sizing
Risk Reward Ratio
Stop-Loss & Take-Profit

In the financial world, traders usually apply the 2% rule. However, this rule is applied more to long-term positions and markets with less volatility, so as an active investor in cryptocurrencies it is highly recommended to use a more conservative strategy. Traders in cryptocurrencies thus use the 1% rule. This does not mean that one can only take small positions, but that in the worst case (SL hit) one can only lose 1% of their total portfolio.

  • Portfolio size: total
  • Risk portfolio: 1%
  • Expiration point: distance to Stop-Loss

The formula by which we calculate the size of a position is as follows:

position size = (portfolio size x risk portfolio) / expiration point

The risk/reward ratio compares the actual level of risk with the potential return. When trading, the riskier a position, the more profitable it can become. Understanding the risk/reward ratio will help you know when to enter into a trade and when it is unprofitable.

The risk/reward ratio is calculated as follows:

R = (Target PriceEntry Price) / (Entry PriceStop Loss)

Stop-Loss refers to an executable order that closes an open position when a price falls to a specific value.

Take-Profit is an executable order that liquidates open orders when prices rise to a specific level. Both are good approaches to managing risk.

Stop-Losses prevent you from getting into unprofitable trades, while Take-Profits let you get out of your positions before the market can turn against you.

You can use Trailing Stop-Losses and Take-Profits that automatically track price changes. However, such a feature is not available on most crypto exchanges.

Scalpers are traders who place a large number of trades in a day, often dozens or even hundreds. They concentrate on making numerous, albeit small, profits. Trades are typically completed within seconds or minutes, and the majority of scalpers only operate during the busiest periods of the day when there is sufficient trading volume and market volatility."

Scalpers primarily use minute charts. Due to the high frequency of trades, scalping is mentally demanding and, as a result, may not be suitable for most individuals.
In finance, risk management is the process of identifying, analyzing and accepting or mitigating uncertainty in investment decisions. So it basically involves assessing and responding to potential risks. Typically, risk management involves five steps: setting goals, identifying risks, assessing risks, defining responses and monitoring.

Traders use strategies such as portfolio diversification, asset allocation and position sizing. Inadequate risk management in financial instruments can have serious consequences!

There are several reasons why an investment may fail. For example, a trader may lose money because the market moves in the opposite direction or because they become emotional and sell their position in a panic.

Emotion and the wrong mindset often cause them to ignore or abandon their initial strategy. In financial markets, most investors or traders agree that good risk management contributes a lot to their success.
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