Gate.io AMA - Trading Risk Management

Q: Last week we discussed about Trading Psychology. This time let's get more details about how to do the trade with right risk control.

A: Interesting topic, here you go.

To earn more money in a right way, we need good Risk management.

1.Risk management helps cut down losses. The risk occurs when traders suffer losses. If the risk can be managed, traders can open themselves up to making money in the market.

Key Takeways

1.The best traders need to incorporate risk management practices to prevent losses from getting out of control.

2.Having a strategic and objective approach to cutting losses through stop orders, profit taking, and protective puts is a smart way to stay in the game.

Q: Before the management, we should do a little risk assessment for ourselves.

A: Yes, now listing some points for your kind reference.

Assessing risk is essential for determining how worthwhile a specific investment is and the best process(es) to mitigate risk.

Step 1, Risk appetite

In the trading world, risk appetite is the amount of capital you can put at risk. In other words, the amount of money you can afford to lose without it affecting your life in a significant way.

The amount corresponds to your risk appetite, usually between 10-20% of your income for most people.

Step 2, Risk tolerance

Risk tolerance refers to your comfort levels with regard to putting capital at risk.

How do you know what your risk tolerance is? To really understand how much risk you are comfortable with, you will need to execute some trades with real money. Start off by risking a very small amount and then increase the amount on each subsequent trade.

Step 3, Personality

The third aspect of a self-assessment concerns your personality as it relates to taking risks. Some people are risk-averse by nature, while others are more adventurous.

Think about past moments in your life where you’ve been exposed to making a decision while being under pressure, and you’ll know how you might respond to it a little better.

Step 4, Trading approach and strategy

In this step, you try to tie the previous three steps in with the most appropriate strategy or trading method. This concerns the markets or asset classes you trade, the time frame, and the amount of leverage you will use.

Step 5, Timeframes

If you trade with short timeframes, you will risk less on each trade, which means you can use more leverage. However, short-term price moves depend more on supply and demand than on fundamental factors.

If you are more cautious and like to trade strategically, a longer timeframe may be more appropriate. For longer periods, fundamental factors play a bigger role, and you’ll have longer to make a decision.

Trading a market and using a method that makes sense to you will make it easier to trade with an appropriate level of risk.

Q: Now let's go to the details about how to do risk management.

A: To manage the risk, please note below points:

1.Planning your trades.

Successful traders commonly quote the phrase: "Plan the trade and trade the plan." Just like in war, planning ahead can often mean the difference between success and failure.

1).Don't trade too frequently.

2).Always set up Stop-loss (S/L) and take-profit (T/P), to avoid big loss.

2.Consider the ratio of the investment

1.Usually we control the investment of about 30% of all of our capital. Even if you are very sure about the trend, don't use more than 60%.

2.Set position at low level, plus reasonable leverage.

3.When you are sure about the trend, gradually add up your position or decrease your position.

4.Set up Stop-loss (S/L) and take-profit (T/P) at reasonable points.

Remember? We talked about emotion management in the last AMA:

1.Don't be greedy.

2.Leave the trade when you earn the reasonable profit, don't hesitate. There's always the profit to earn as the market will never stop.

3.After three time's wrong trades, leave it away.

4.Trade in calm and cool mood, if you are too much high or low emotion today, don't play trades. Drink some tea and calm yourself first.

Q: There's one point that is very interesting, how to set up the reasonable Stop-loss (S/L) and take-profit (T/P).

A: Good question, let's get into more details.

Stop Loss (S/L) orders allow you to minimize losses by automatically closing a position should the price of an asset reach the price specified in your Stop Loss order.

Take Profit (T/P) orders allow you to lock in profits by automatically closing a position should the price of an asset reach the price specified in your Take Profit order.

Please check the chart below about how to set it up when opening a position.

Q: Thanks for all above.

A: Let's go to Question Session.