Crypto volatility has taken many men’s souls. You could follow influencers, put your money into tokens with small market caps. To zero. Become exit liquidity for the very influencers you follow. Trade perpetuals, experience a streak of losses, lose your hard-earned portfolio. All possible and very common.
Or you take the professional approach.
We won’t bore you by deep diving into mathematics, statistics and probabilities, but get straight to the point. Time is money.
Proper, fundamental risk management seeks to reduce the size of potential losses and ensure the trader lasts to survive in the volatile crypto markets.
The trading portfolio should be limited in size compared to the long-term portfolio. In the latter the trader can keep BTC, ETH, comparable large tokens, or other assets. Rebalancing only occurs at the last day of each month. Do not use your entire portfolio to trade.
You have $50,000 in digital assets.
80% = $40,000 to invest. For example DCA into Bitcoin, hold in a cold wallet (Ledger, Trezor).
20% = $10,000 to trade with, for example ETH or USDT on a hot wallet (MetaMask or a CEX).
This ensures you survive, whatever may come.
Clickbait title aside: Risk only 1% to 3% of the trading portfolio per trade if you begin. It is important to be safe for occasions when there are losing streaks.
For example, on a 50% Win/Loss Ratio, a 5 loss streak is very likely, with a 76.8% probability.
It is important to manage risk to survive such events. If you risked even 15%, the entire portfolio would be crushed already.
A stable win/loss ratio will develop from a cleanly, repeatedly executed system which you can use to become profitable. The law of large numbers is a mathematically proven principle. It cements that if a trader holds an edge, over time this edge will manifest itself.
For this to happen you must survive enough events for your edge to manifest itself. Again, this is a scientifically proven principle, not an unproven theory. This is one of the open secrets to turn you towards a profitable upside.
Accurate indicators and systems form this very edge. Thus QuantraAI offers is this edge.
Now you’re thinking like the mathematicians that engineer real-life casinos.
Starting balance $10000, Risk 3%, Risk to Reward 3, Win/Loss ratio 40%, 100 trades. You can experiment with the probabilities in a calculator at Coghlan Capital's.
But why is this profitable with a stable W/L ratio of 40%?
P.S. Another important mathematical theorem, the kelly criterion, adds to the confluence here. You can explore the chart at the very bottom of the page here. If you act like the house, you can become the house, which wins over time. Consistently, and non-discretionary.
We need to get on the same vocabulary and speak in terms or Risk Reward:
An R is a unit of risk - the percentage of your trading portfolio you would lose if a trade runs into your Stop Loss. This is always a percentage depending on your current portfolio, never a fixed dollar-value. This is important for it to statistically work.
Depending on the system you build and use, you should target a 2R or a 3R for your take profit level.
A 2R in a trade is not necessarily harder to achieve than a 1R, depending on the system used. It enables you to be profitable even with systems that are only right 40% of the time.
This allows us talk about profitability of systems - whether the portfolio is small or large.
Most traders try to use leverage to multiply their money. It may work once, or twice, but then comes a wick of doom. A streak of losses. Soul crushing annihilation. Whoever experienced it first hand, knows it.
High leverage threatens any trader with closeby liquidation levels. This fades the law of large numbers, fades the manifestation of an edge. The cries of thousands of souls in liquidation echo through web3 - on the daily. Margin calls in the inbox. Liquidations annihilating weeks of work, while filling the pockets of whales.
This will happen to anyone - if leverage is used falsely.
There is only one correct way to use leverage, by iron rule:
Use leverage only for capital efficiency. It allows you to keep less money on an exchange, while trading lrger positional sizes. Their size is defined so that they fit your current R. The next chapter shows you how to size positions correctly.
Your risk must stay consistent, so that your edge can play out over time. Your Stop/Loss gets defined by the market’s situation. Your R must fit to that Stop/Loss, wherever you set it, whatever the token is valued at, and with whatever maximum leverage you use.
With different tokens on different values, dynamics, volatility, margin size, leverage, and trading portfolio size, doing a calculation each time can be complex… a lot of variables. This can lead to mistakes, which can be costly.
Furthermore the exchanges require different input variables to open positions. Some Position Size ($) and Applied Leverage (x), others Margin ($) and Applied Leverage (x), yet others Margin ($) and Position Size ($). This adds to the probability of mistakes happening!
For a practical solution to this, we share our calculator with you! Please find the calculator on the bottom right hand side.
You will receive
Hence the calculator is compatible to the variety of inputs, which differ depending on the exchange you are using. Stick to nominal value ($USD) and percentages at all times: The Position Size Calculator will always work. You do not need to enter individual token value.
Requires Position Size ($) and Applied Leverage (x) as inputs. Please ensure that “Isolated Margin” and “Order by Value” are selected, this way you control your risk and contain it in one position. Then enter Position Size ($) and Applied Leverage (x). Always set your Stop Loss before executing the trade. You can enter the same Stop Loss Distance (%) that you have entered into the calculator!
Link to Bybit CEX (affiliate link)
Requires Margin ($) and Position Size ($) as inputs. Leverage will auto-adjust dynamically. Please ensure that "sUSD" is selected as value for your Position Size ($) as seen in the image. Then you need to take the nominal Stop Loss from your intended trade on TradingView, as seen in the image. Please ensure you have entered your Stop Loss before executing the trade.
Requires Position Size ($) and Applied Leverage (x) as inputs. You need Leverage only allows the selection of natural numbers, an the margin will thus just be approximately what you've planned. Please ensure that "USD" is selected as value for your Position Size ($) as seen in the image. Then you need to take the Stop Loss Distance (%) from your intended trade on TradingView. Please ensure you have entered the Stop Loss before executing the trade.
If you make twenty to thirty trades in a month, it may not be clear afterwards:
An honest Trading Journal allows you to analyze not just your own behavior and optimize it over time.
It also allows you to see what kind of trades work best for you.
At the end of the month, count the trades and group them. You can see what type of trades were most successful, and build your skill in these: Maybe you primarily trade breakouts, maybe mean reversion trades, or maybe trends on short timeframe confirmed by large timeframe.
Ultimately, you want to take any emotions out of your decisions, and follow your systemizations. And always remember that each trade is a new trade. Anything that happened before, should have no bearing on your decisions.
For software as a log book, keep things simple: You got Discord, you could create a private server just for your Trading Journal.
