How to manage risks in crypto futures trading?

AdvancedDec 14, 2022
Highlights 1. The advanced Gate learn column helps users build their own professional futures trading system. The framework is built around investment philosophy, futures tools and trading system; 2. Risk management is an important part of futures trading. We will start from the fundamental concepts, common strategies and then analyze based on real cases.
How to manage risks in crypto futures trading?

一、What is risk management in futures trading

- What is risk

Risk is the uncertainty about the future investment returns in the market. Investment risk includes potential loss of income or principal loss. The characteristics of risk contain objective possibilities. That is to say, relevant methods can be taken to prevent the risk from happening or to reduce the loss induced by the risk, but risk can not be fully eliminated. So, risk management is extremely important in the market.

- What is risk management

Risk management is the use of effective methods to lower the probability of occurrence of risk events, or to effectively reduce the loss to an acceptable range after the occurrence of risk events. Inexperienced traders tend to focus too much on technical analysis and trading strategies and trust strategic indicators too much.

These traders often ignore the probability of risk occurrence and place all their positions as initial margin. These traders with heavy or even full positions will be in a very dangerous situation in the market if they do not take effective risk management methods.

二、Factors to focus on in managing risks of futures trading

- Win rate

Win rate = the number of profitable trades / the number of profitable, unprofitable and tie trades. In a proper trading system, the win rate and profit/loss ratio are interconnected. A trade with an excellent profit/loss ratio may still result in a serious loss of principal in the long term operation due to a low win rate. Even an extremely high profit/loss ratio is not able to cover the loss of a low win rate;

- Profit/loss ratio

Profit/loss ratio = average profit / average loss. A too low profit/loss ratio can result in more profits than losses. If our risk management strategy is to set a profit/loss ratio for each trade at 1:1, we have to keep the win rate over 50% to ensure profits of positions.
A high profit/loss ratio in trading strategy can effectively compensate for the losses induced by a win rate below 50%.

- Transaction costs

Costs include trading fees, funding fees, interests and other potential costs. Traders need to take these factors into consideration and make assessments.

三、How to manage risk in real futures trading

1. Identify risk tolerance

In each futures trade, traders have to identify the proportion of a single loss to the total amount of funds in the account. Take the frequency of one trade a day as an example, if the losses of a single trade account for 10%, 10 consecutive trading losses can cause you to lose all the money in the account. Such losses are unacceptable for a qualified futures trader.
But if we control the proportion of a single loss to the account at 5%, 3% or even 1%, the chances of losing all the principals drop significantly.

2. Strictly execute the futures trading plan

The chart below shows the important factors included in a complete trading plan. It is subject to change according to the crypto market situation, but the general logical framework is always applicable. Traders can start to evaluate where the market is in the economic cycle and then find opportunities by means of technical analysis. Finally, a detailed execution plan can be written on specific trading targets.

3. Do proper position management

After identifying your risk tolerance, do proper position management. We will do a special topic on how to manage positions in futures trading, so we will not cover more in this article.

4. Take profit dynamically. Stop loss decisively. Stay positive! Get over FOMO

a. The market is volatile and unpredictable. The probability of making right decisions five consecutive times is less than 5%.
b. Investment itself is not risky, but getting carried away is the largest risk.
A good futures trader follows the strict discipline of stop-loss and take-profit. Every position is opened logically, with a clear set stop-loss point and dynamic take-profit strategy. Let the risk be controlled. Let profits run!
Traders can relax and are able to cope with any market emergency if they can execute trading plans, do proper management of positions and set a stop-loss and take-profit price in every trade.

四、Closing thoughts

Risk management in trading is a must for every successful trader. In this topic, we mainly focus on several features of risk management, how to do trade planning and other useful techniques.
To check out more real trading practices, go to futures trading. Register a account now and start your journey!

This article is for informational purposes only. Such information provided by does not constitute any investment advice and we are not responsible for any investment you make. Technical analysis, market judgments, trading tips, and trader sharing may involve potential risks, changing investment environment and uncertainties. This article does not provide or imply any opportunities with guaranteed returns.

Author: Frank
Translator: Kris
Reviewer(s): Levion
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