Money management in cryptocurrency trading: rules of successful trading

Money management in cryptocurrency trading: rules of successful trading

Cryptocurrency trading is gaining momentum thanks to the potential possibility to make a profit. Not to lose funds and to increase initial capital, you need to build a proper trading strategy and remember that there are risks in any financial operation. Let’s study the basic principles of cryptocurrency trading and learn how to manage your capital correctly.

Tools of management of risks and capital

The main principle of any trading is to build a clear strategy of trading rather than to rely on luck. As the situation in the market is constantly changing, a trader needs to adhere to the rules of money and risk management to avoid big losses.
 

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Defining the sum of trading capital

Before you start trading, it is important to allocate a sum that will serve as trading capital. You should define the amount you are ready to lose. Experienced traders recommend that this amount should not exceed 10% of your monthly income.

Defining a stop loss

Astop loss is an order to close a transaction in case prices are changing unfavorably. It protects the trader against big losses, so it is a nice idea to define it for every deal in the sum of 1-3% of the entire deposit.

When defining a stop loss, exchange traders often follow the rules of 2% and 6% from the professional trader Alexander Elder. He believes that it is preferable not to risk more than 2% of your capital at every transaction.

Such a principle will help to avoid a dramatic loss, and the rule of 6% prevents the trader from a series of losses. It defines the maximum risk per session, and if the loss exceeds 6%, it is recommended to stop trading for 1-2 weeks.

Defining a take profit

It is also important to remember about the take profit order, which is the level of price at which the position is closed out and the trader receives a profit. The recommended ratio of a stop loss and a take profit is 1:3.

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Strategy of successful cryptocurrency trading

One of the most important rules of trading is to analyze all possible scenarios and draft a clear plan for every situation. A plan that is well thought out in advance will help to avoid emotional decisions, which increase the risk of losing invested funds.

Besides, a clear strategy will help the trader in case failures happen in the operation of the exchange.

For example, if prices change suddenly, a stop loss order may not be executed and in such a case, the trader will lose much more than it was expected. In this situation, the trader should close the required position manually, and a plan that was prepared in advance would help to do it quickly and seamlessly.

Common mistakes in trading

Beginning traders are often trying to find a regularity in price changes and forecast its further behavior. However, even after successfully defining the direction of prices, the trader will not be able to conduct stable efficient trading for a long time.

Besides, when you start to trade cryptocurrencies, do not try to calculate the future earnings. The main thing is to focus on the initial capital and create conditions that can ensure maintenance of investments.

At the start of cryptocurrency trading, you should remember about existing risks and follow money management rules. Appropriate planning will help not only to keep but also to increase the initial capital.


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