Yesterday, I made a post on how to make a plan when you want to trade. Today, I will make a post on how to manage risk, more specifically on how to choose leverage and manage that risk. Even 2X leverage is risky because it can liquidate your money.
Risk management cannot be approached by everyone in the same way. It is usually tailored to everyone's risk-taking tolerance and portfolio size.
Do you know why risk management is so important? Because if it is not applied, one can lose their entire investment on a single trade.
Now, let's start. For the sake of the argument, let's say I have $10,000 and I want to trade and invest this amount to increase my capital. The first thing I must decide is how much of that I am going to use specifically for trading. As you might have guessed, using all of it for trading is wrong. I must allocate some for buying long-term coins, keep some as cash always to buy the dip, or just have it for a rainy day, and allocate some for trading. Trading and leverage have the advantage that you can use a smaller capital and increase it with leverage. So, let's say I am using $1000 of the total $10,000 just for leverage trading.
Now, you have to understand that position size determines your PNL (Profit and Loss) for a trade; leverage does not determine it. Leverage only determines how much margin you are willing to lock in to achieve that specific position size. That means that if I want to trade $1000 worth of a crypto, I can use 10X leverage and add $100 of margin to achieve the same result, or use $10 worth of margin with 100X leverage and trade as if I had $1000. The profit or loss you make depends on the position size. Higher leverage = Lower margin.
According to my leverage, I use the following to determine the amount of capital I am using: If leverage is between 2x-10x = Use 3% per trade. If leverage is between 10x-25x = Use 2% per trade. If leverage is between 25x-100x = Use 1% per trade. If leverage is greater than 100x = Use 0.5% per trade.
Now, don't forget that when using leverage, your position can go to 0 and you can lose everything, so you MUST put stop losses. Support and resistance are the best places to put those stop losses, and of course, determine your take profits. One great way to take profits is to take a percentage of take profit, let's say 30%, then move the stop loss to the entry in order to fully protect some of the profits. When it goes higher, take another 30% and move the stop loss to TP1.
One more thing: If you lose 3 trades in a row, stop trading for the day.
More reading
10 Steps Of Top Risk Management In Leverage Trading