Risk and Money Management in Crypto Trading

Last week saw the beginning of our Bybit Engage topic discussions in our Bybit Telegram group.  Serhii, our Bybit Ambassador from Ukraine, shared his top tips for risk and money management in crypto trading.

1. FOMO (Fear Of Missing Out) won’t beat you if you have a plan

FOMO is a term often floated around in the crypto world. Because of FOMO, many crypto traders still act on emotion instead of having any sort of plan, and that, unfortunately, more often than not is only going to end badly. A plan of when to buy, and when to sell, as well as risk and money management (see tips 3 and 4) are crucial if you want to be a successful trader.

Looking for trading patterns is a good way to decide when to buy or sell – for example, a triangle trading pattern.

We can wait for a breakout of the triangle (at the bottom or at the top)

We can create two Conditional Orders in such a situation. Let’s say the price of ETH is $286, for example. The first we can set up is a Buy Stop order at – say, $289. On the second we can set up a Sell Stop Order at – say, $283. If the price goes lower, we have an open short position at $283 and the first order will be closed. For the open short position, we can set up a Stop Loss and Take Profit.

In the opposite scenario, if the price goes higher than $289, we can buy the first order, setting up Stop Loss and Take Profit, while the second order will be closed. This is an actual plan, and planning ahead will bring you more success in trading than FOMO ever will, however appealing it may initially seem to make emotional decisions.

2. Stop Loss

This is a very useful tool in risk management that shouldn’t be forgotten about. Sometimes it may be obvious where to place Stop Loss, while sometimes it may be more difficult. The market may suddenly change direction and you may be at risk of liquidation and losing all your margin if this happens, but this can be avoided if you set up a Stop Loss order.

Although Stop Loss can indeed prevent liquidation, please be aware that the Mark Price determines the Liquidation Price. Therefore, there may be a case where the Mark Price reaches the Liquidation Price before the Last Traded Price reaches the Stop Loss price. So, it is advisable to keep tracks on the market if you think there is a risk of this happening, so you can sell (go long) if necessary before this happens.

3. Calculating the potential risk against potential profit

When conducting a trade, it is imperative to consider its potential risk against the potential profit. To calculate your risk/profit you can use this formula:

RISK/PROFIT = (Take Profit – Buy position) / (Buy position – Stop Loss)

If the potential profit is less than 2 times the risk – i.e. the answer is less than 2, then think very carefully about doing this trade.

For example you buy BTC at $10,000 and set a Take Profit at $12,000 and a Stop Loss at $9,000:

(12,000 – 10,000) / (10,000 – 9,0000) = 2 – so this could be seen as a worthy trade according to this formula.

4. Money management

When determining the risk of a trade, money management is also very important. Risking 1-2 % of your total trading capital (money you have set aside for trading) is sensible if you want to make profit long-term.

For example, if your trading capital is $10,000…

If you buy ETH at $185, this is 1.85% of your trading capital.

5. Keep 30% of your trading capital in stable coins

Cryptocurrency markets are notoriously volatile, so it is sensible to keep a set amount of your trading capital in stable coins, and 30% is a sensible amount. These can be easily converted to fiat if needed and can also act as a contingency in a worst-case scenario – for example, if you’re liquidated.

6. Don’t bet against the trend

Remember, trend is your friend! If a trend is bullish – do not sell. Wait for a correction and buy. It is risky to buy when the price is in free flight because of the risk of an impending correction and potential liquidation, so it is always best to buy at times of correction for this reason.

The above chart illustrates the price movements of a market through Elliott’s Wave Theory. So, if you didn’t buy on the first wave, you can buy on the second wave, if you didn’t buy on the third wave, you can buy on the fourth wave.

On the flip side, when you see bearish signals – do not buy. Wait for a correction and sell.

Also, we can switch to 1H-4H timeframes and see some levels, if we are trading during the day, which prices cannot pass (resistance levels, indicated by the red lines on the below chart) and so is a good time to sell, or where prices bounce back from (support levels, indicated by the  green lines on the below chart) and so is a good time to buy.

On a longer time frame, when BTC hit $3000 in late 2018, there were clear support levels and that could certainly could have been seen as a good to buy. Alternatively, when all-time highs were hit of $20,000 in late 2017, there we clear resistance levels and that could have been as a good time to sell.

7. Only invest what you can afford to lose

This may seem like obvious advice, but only invest what you can afford to lose. Ultimately, cryptocurrency markets are not just a money-making machine, it takes a lot of patience to make a long-term profit. It pays to be sensible with your money, and it certainly is sensible to only invest what you can afford to lose.

8. Sleep well

Here at Bybit, you can trade 24 hours a day, 7 days a week, but that doesn’t mean you should take that as a literal invitation to do so! To be a successful trader, you need to have the mental capacity to think rationally, and you can’t do that if you don’t get a good nights sleep. And don’t let trading overcome your day-to-day life, you still have a life to lead.

9. Use Bybit!

Perhaps the most useful tip of them all! Bybit is committed to offering the most smooth trading experience possible, and we always put the needs of our customers first. Not only do we offer 24/7 multilingual customer service, your funds are safe with our multi-signature cold wallet, you don’t need to worry about overloads thanks to our 100,000 TPS matching engine, and our advanced order system allows traders to set up multiple order types.


* This content does not represent the views of Bybit. As such, it should be not be seen as trading and financial advice, it is merely an opinion. Trading is done at your own risk.