Hello friends! We have had a lot of growth in august on this blog. Looking forward to much more growth in the upcoming months.
In this guide we will be talking about risk management and how to avoid one of the biggest mistakes that new traders do: Placing a too large percentage of their capital on a single trade. Very often with too much leverage!
- Why do beginners trade with a percentage of their capital?
- What are the consequences?
- How much is a too large volume?
First of all:
Why do beginners trade with larger volumes than they should?
To be honest there can be many answers to this question, but most point into the same direction: Psychology.
One of the biggest reasons that new traders fail with their trading strategy is because they let emotions distract them from following through with their strategy.
They do not respect profit risk ratios and take profit too early or let losses get out of hand. Cryptocurrency has a lot of similarities with stock trading but it still has some main differences that can change the way you analyse the charts. Since crypto is very fast paced and is very volatile, that means that new traders can either earn a lot or lose a lot due to spikes or flash crashes.
Such crashes are normaly insured in the stock trading world but not in crypto.
Here is an example of the ethereum flash from last year where it went to 10 cents
If you are unlucky your bitfinex account can go into debt because of too much slippage after the stop loss was triggered.
@bitfinex You need to make this right - I just went from $100k to -$30k … refunds need to be made and owners made full. This is unacceptable. $NEO $OMG $ETP pic.twitter.com/HcPJlSF1Gk
— Brian (@biop3rl) November 29, 2017
Understanding FOMO - Fear of missing out
When you have skin in the game you will be irrational with your trades at the beginning. If you let your emotions control you, then you will be chasing after trades that are already going in one way or another before you managed to get in. On a longer timeframe
If you are a beginner there are several reasons why you are trading a too big part of your capital. Many new traders believe they can make a lot of money in a hurry. When they lose they believe they can make that money back by increasing the size of their positions. When new traders start losing or the price starts going up after selling everything, they will start feeling the pressure. That is when everything starts to spiral under control and a small loss can result into a catastrophic loss.
Why is trading with high volume bad, what mistake does it lead to?
When you trade in crypto markets you are trading in one of the markets with the highest risk. You can have lucky and get 5 good trades, but then the 6th trade can ruin you if you are using too much leverage.
The first mistake that high volume trades bring is amplifying your emotions. You know how everyone talks about leaving your emotions out of trading? That will be impossible once 25% of a lost trade actually means 25% of your whole capital if you go all in – NEVER GO ALL IN!
You will be run down by emotions and you won’t be able to take any logical decision or follow your initial plan, if you had one.
The other general mistake is that it’s really bad practice and trading high volumes of your capital has nothing to do with pro trading. Just with gambling. Let’s trade, not gamble.
How much is a too large volume for a trade? What is the appropriate volume for a trade?
In numbers: all in is a huge mistake. 50% is a huge mistake, 25% is a huge mistake for one trade. Do you get the picture? If you are a beginner and you don’t know what to do, before you get to learn proper money management please follow this very simple rule which will save you:
make your trades small. Stupid small.
So small that you will think you are not earning anything if you reach profit.
But why trade like that then, if it is not fun?
Well, I said it before – treat trading like a business not like a game. If you are going to trade small, in the beginning, until you learn, you will not only profit small, but you will also lose very little.
If you lose very little – you will not have emotions anymore.
Without emotions you will be able to analyse your trades, gain experience, make logical moves and follow plans. Then rinse and repeat 1000x times these small volumes. By slowing down, having patience, you will win the trading marathon .