Greetings to you my humble blurters. Today I want to share with you about why risk management is very important in our trading activities be it whether you are just a crypto trader or forex trader and even a trader that do buying and selling of physical assets this topic is very important to you and even the company that you are with. Without wasting time let's get started.
Understanding of Risk Management
The term Risk Management is not a new word that you must have hearing for the first time. This is a words that is usually been spoken often as a trader or businessmen and women. The question most crypto trader do asked is nor fail to asked is how to understand risk management. To an ordinary business man or layman the words risk management is simply the analysis or Identifying and controlling of treats that is surrounding the capitol and earnings of a businesses or individual. This is because business is something that involves different source of income like company assets, capital, funds etc. Although, as a trader be it crypto or forex trader, your understanding of risk management should be different from that of a layman.
Risk Management is method of Identifying, analysing and responding to risk factors that is associated with trading activities. This means that risk management is that action that a trader has strategies (map out) before before placing either a buy/sell order trade so unnecessary losses that is associated with trading can be minimizes to the minimum. A good risk management strategies helps crypto/forex traders and even Investors to control future losses that may occur by stoping the losses quickly rather than delaying until the losses occur. This means that as a trader if your risk management is well strategies out there is always a big potential that your risk has been reduced grastically low.
Why Risk Management is Important in Crypto Trading
When it come to crypto trading, you should not just with risk management because it's very important as it empower crypto traders with the rightful tools that can help them Identify and deal with future risk untime. Identifying of your risk untime can help you to overcome losses. To how risk management is so important to be and how it has help me overcome losses I have listed discussed briefly on time below.
- Risk Management Trading Activities
As a crypto trader risk management help traders in providing them with the necessary tools that they can use an avoid risk. With the rightful tools that is provided by risk management trader can identify adequately and deal with future potential risk that may occur in our trading activities.
- Risk Management reduced fear of losing out in trading
Risk Management is so important to traders as it ensure high priority of risk can be totally dealt with as fast as possible before it can lead to losses of funds which reduce the fear that is associated with crypto trading. Also with risk management trades are been giving the important information that their can use to make sound decisions that will profit them when trading.
- Risk Management help traders to make sound decisions
Risk Management help traders to make sound decisions as to when their are to enter trade or exit trade.
- It make trader to more focus
Risk Management is so important in crypto trading as it make traders to be more focus on the strategy which their have identified in avoiding risk. With this traders are more focus on how to avoid eventualities that may occur in the process of trading.
Risk Management tools
Here, I will be discussing on some of the risk management tools that we can use to avoid losses of funds in our trading activities, so let's get started.
One percentage 1% Rule
One percentage 1% rule is the most highest an well recommendable tool that traders usually make use of when trading in other to achieve effective risk management. It is simply,the strategy that traders make use of to reduce the losses that may occur,on their funds. In 1% rule the risk that is involves is not more than 1% of the invested fund that is use for trading. This is the reasons why most traders are successful than the others traders simply because their make use of 1% rule as their trading strategy which means that their can only loss 1% out of their investment if there may be losses that may occur.
FOR example, looking let's said that,Mr.Mike who has been trading crypto for years, fund his account with the sum of $350 dollars and he then applied 1% rule in his fund. This implies that mr.John is risking 1% out of his $350 dollars which mean that if losses will occur he will only lose $3.5 dollars out of his $350 dollar.
Let's consider looking at this illustration where Mr.John applied a higher risk percentage like 5% I his crypto trading. In this illustration, me. John place an order using a 5% risk rule, instead of the 1% risk rule and he place a trade when later turn out to be losses. This means that Mr. John has losses 5% from his $350 dollars which is ( 5 ÷ 100 = 0.05 × $350 ) = $17.5 dollars has been loss.
This is the main reasons why traders consider applying 1%.risk management tools rather than anything percentage that is above 1%
Risk-reward ratio
Risk reward ratio, is another highly and we'll recommendable tools that traders also used to reduce risk as a means of effective risk management. In risk reward ratio the most recommendable ratio that is to be use is 1:2 Risk ratio ratio. Use any ratio that is below 1:2 risk reward ratio may make the trade which has been place to reverse an cause you to loss your funds.
Let's consider looking this illustration,a trader has open a trade has place his risk as $20 as his risk whereas his take profit is then set at $30. In this illustration we can see that what the trader is doing doesn't make sense because he is making use of 1:1 risk ratio reward that is not good in crypto trading. But in the case where he is risking $20 using 1:2 risk reward ratio his gain should be $40.
Stoploss and take profit
Any trader that understood what risk management is all about will eventually know when to place his/her stop loss and take profit. This is because risk management has provide tools that traders can use to identify market trends that is when price is moving in an uptrend or downtrend. Understanding of support and resistance levels is also gainful when you understand what risk management is all about.