A trading plan is a must-have for every serious trader. The advantages of having a trading plan are numerous, ranging from lowering stress to missing fewer trades and becoming more conscious of your trading habits, helping you to make highly targeted development and treat trading seriously.
Risk management techniques such as Stop-losses and Total Capital at Risk can protect your investment capital from outsized losses.
Never invest money that you can't afford to lose. Trade crypto futures with excess savings to detach emotions from your investment decisions.
With better risk management, cryptocurrency trading can be highly lucrative. However, if it’s not done right, a trader can suffer huge losses.
Even though crypto futures are highly profitable due to the high leverage provided, the losses can be equally substantial and, in some cases, larger than the initial investment. To be profitable in crypto futures trading, it is vital to establish a rock-solid risk and money management strategy.
Best Ways to Manage Money and Risk when Trading Crypto Futures
1. Trading Plan
A trading plan is a must-have for every serious trader. Especially in the highly volatile crypto markets, a trading plan can help you to manage risk better. A trading plan could also help you improve trading consistency and eventually allow you to scale to profitability.
When developing a trading plan, you must include a detailed layout of how you would enter and exit positions, including entry and exit indicators, position-sizing, and stop-loss placements. The advantages of having a trading strategy are numerous, ranging from lowering stress throughout your trading day to missing fewer trades and becoming more conscious of your trading habits, which helps you to make highly targeted development and treat trading seriously.
Once you have a strategy in place, the next essential step is to stick to the trading strategy, especially in a losing trade. In trading, losses are part and parcel of the game and are completely normal, even for the most experienced professionals. Often, we see new traders abandon their plans once they start losing trades. Sticking to the strategy is a critical aspect of building a good long-term trading record. Whenever you panic and abandon the plan, it’s likely that you will make more off-track trades. Worse, you could even make more trades out of the fury to regain what is lost and eventually losing more.
2. Stop Loss Orders
The fundamental concept of risk management is to reduce the risk of outsized losses. And one of the common methods to minimize losses is by using a stop-loss. A stop-loss is an order that allows an investor to limit the possible loss on an investment by specifying a price limit over which the asset will move. Assume you purchase 10 BNBUSDT contracts on Binance Futures at $350 each. To minimize the possible loss on this transaction, you could place a stop-loss order at 20% below the purchase price, or $280.
If the price of BNBUSDT falls below $280, your stop-loss order is triggered. The exchange then sells the contracts at the current market price, which may be precisely at the $280 trigger price or substantially lower, depending on prevailing market conditions.
Investors use stop-loss orders as part of their risk management strategy to exit positions if they don't perform as expected. Stop-loss orders enable investors to make predetermined decisions to sell, which helps them avoid letting their emotions influence their investment decisions.
3. Money Management: Never Risk More Than 5% of Capital Per Trade
Money management is a method for adjusting your position size to reduce risk while maximizing the growth potential of a trading account. It is a strategy to limit the capital placed on any one trade to 5% or less of the account value, never more. The dollar value of that 5% goes up or down as the account value changes, but the 5% limit ensures that you do not overexpose your entire account to one position.
Due to the unpredictability and volatility of cryptocurrencies, it is possible to lose your entire investment capital in minutes when investing in high-leverage derivatives such as crypto futures. As such, investors should observe a stricter limit; the rule of thumb when it comes to trading in volatile assets is to risk only 1-2% of your capital in a given trade.
For instance, assume you have USDT 10,000 in your USDⓈ-M futures wallet. In this case, you would allocate between USDT100-200 of risk per trade. Should a trade go wrong, you would only lose 1-2% of capital in your account.
Managing your risk well means having the right position sizes, knowing how to place and move your stop losses, taking into account the risk/return ratio. A robust money management plan allows you to build a portfolio that you won’t lose sleep over.
4. Don't Over-Trade
Any investor or anyone looking to trade in futures must be careful to make sure they don't overtrade. Overtrading occurs when you have too many open positions or risk a disproportionate amount of capital on a single trade, exposing your entire portfolio to undue risk. To avoid over-trading, one must adhere to their trading plan and exercise discipline in sticking to their pre-planned strategy. Most new traders are notorious for over-trading, and more often than not, it is due to the failure to control emotions such as greed, fear, and excitement.
Though traders can profit massively from opening many positions, the losses can be equally devastating. A prudent approach to limit the losses from all your positions is to place a ceiling on the amount of capital you risk at any one time. If you have 25 positions in your portfolio, for example, and the amount at risk for each position is 1%, it’s conceivable (and almost anything can happen in the crypto markets) that all 25 positions will go against you at the same time and cause a major loss of 25% of your portfolio. In addition to risk per trade, you should also consider the cumulative amount of risk in your entire portfolio, this is also known as the total capital at risk. As a general rule, your total capital at risk should be less than 10% of your portfolio, which means if you’re risking 1% of your portfolio per trade, the maximum number of open positions is 10.
5. Only Invest What You Can Afford to Lose
There's one golden investment rule that you should always keep in mind: never invest money that you can't afford to lose. When dealing with crypto futures, one prevalent characteristic is volatility. Losing money in a highly volatile market is very easy. The prices can change drastically at any time. Devoting more than you are willing to lose puts you in a tight spot. Therefore, you should only trade crypto futures with excess savings to detach emotions from your investment decisions. A good trader must be willing to keep their emotions away and operate in a systematic and calculated way. In addition, ensure that you have established a robust risk and money management strategy to protect your capital at all times. Remember to always utilize the rule of thumb of risking 1-2% of your account balance per trade. Importantly, brace yourself to make losses and accept them as part of the futures trading process.
Trading futures can be highly profitable, especially with the high leverage it provides. However, without a clear understanding of how it operates and how to minimize associated risks, one can lose their entire investment. Crypto futures are undoubtedly great financial instruments to invest in if you are looking to realize huge profits. Good money and risk management can help you maximize returns and reduce the losses incurred trading crypto futures.
Read the following support items for more information:
(Support) How to Place Stop Loss Order and Take Profit Order
(Blog) How Binance Takes Responsible Trading Seriously, and You Should Too
(Blog) Crypto Spot vs. Crypto Futures Trading - What’s the Difference?
And many more Binance Futures FAQ topics...