On this Fifth edition of DueDEX Connect we are looking at one of the most important elements of crypto trading - how to manage risk. For this purpose, we are excited to have Alexander here tonight.
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DueDEX: Thank you very much Alexander for joining us. Risk management is a huge topic for traders, regardless of their strategy. In a way, one could say that trading is all about managing risks and rewards. Given there is so much out there to discuss, where would you like to begin?
Alexander: I guess the best way to begin our conversation is by defining the concept we are talking about. “Risk management” refers to the process of making and implementing decisions aimed at reducing the likelihood of an adverse outcome and minimizing possible trade losses.
DueDEX: Exactly! What are the key factors you take into consideration when managing your risk?
Alexander: The one key factor in making trading decisions are your emotions. All traders in the market must control their emotions. Taking decisions impulsively may sometimes allow you to earn more by increasing a position, but losses are also likely to grow greatly.
You have to be emotionally strong to trade effectively.
DueDEX: We were wondering - does your strategy differ significantly when trading on long time frames from working on short ones?
Alexander: My strategy is indeed different depending on time frames. For example, on larger ranges, I can collect a position from 4-6 entry points, while the potential losses are growing, but the profit is also growing.
DueDEX: One of the most popular suggestions out there is the so-called “1 percent rule”, postulating that traders should not risk more than 1 percent of their portfolio in any single trade. (A variant of his rule assumes you should not exceed 2 percent.) Do you agree? Do you follow this advice yourself?
Alexander: The one percent rule is very important for trading. I myself adhere to this rule.
DueDEX: Could you please explain to our users how they can calculate a risk-reward ratio when trading crypto? Do you have a specific ratio you look for?
Alexander: Let us assume you buy BTC at $9000. You then set your stop loss at 8800 and your take-profit at 9400. In this case, your potential profit is 400$, while the potential loss is only $200. You then proceed to divide the potential profit by the loss and get the ratio.
When doing this operation, take your potential losses - your stop loss level - and look at the potential profit - your take profit price - to make sure that the profit indicator is at least twice as much as the stop indicator.
In the example above, the ratio would be 2 (400/200). That would be a good result.
DueDEX: Thanks for the explainer. Do you advise traders o use different risk-reward ratios depending on their trading strategies? For instance, between a scalper and a long term trader?
Alexander: I do not recommend trading small ranges in general. In fact, I recommend trading from 1h upwards.
As for the ratio, it should always be above 2.
DueDEX: One of DueDEX most prominent features is our risk manager, a tool designed to intuitively calculate risks and hedge their bets. Do you reckon the risk manager can benefit traders?
Alexander: It’s really good! The risk manager is a useful tool that makes your trading easier and more comfortable. By using it, your trading decisions will be better than those of other traders.
DueDEX: Great, thank you for the compliments! To the beginners who are following us and may not yet have a proper risk management strategy, what are some simple rules of thumb you would endorse?
Alexander: First, stick to the risk-to-profit ratio. Second, control your emotions. These are two simple, yet important rules.
DueDEX: We have mentioned emotions often today. At DueDEX we were wondering, how much do you reckon psychology plays a role in risk management? For instance, one issue new traders often struggle with is the “need to buy” instinct after a bad trade. This irrational response can lead to more losses, yet it is very common.
Alexander: I think psychology is key to trading in any market. This feeling in psychology is called FOMO, or Fear Of Missing Out - a sense of lost profit.
DueDEX: Taking a closer look at the technical side of things, one major tool traders use to manage the risk to their equities are stop loss and take profit functions, since they allow you to either get out of a bad trade before things deteriorate further or capitalize on a good one before the trend reverses. Of course the devil is always in the details - choosing the right percentage is essential. Do you have any tip in this sense?
Alexander: From a psychological point of view, it is important that your losses do not cause a feeling of anxiety or sadness. This should really be your starting point. I can say from my own experience that earning is not as important in the market. It is more important not to lose your deposit.
DueDEX: Thank you once again Alexander. We appreciate you giving DueDEX users an opportunity to learn more about managing our risks, something we should all learn more about.
Stay tuned for the next #DueDEXConnect!