By: Nadeem Anjarwalla, Binance Director for East and West Africa
Given the limitless trading possibilities that cryptocurrencies offer, it’s imperative to “plan your trades, and trade your plan.” This approach ensures that you’re disciplined, knowledgeable, and thorough with your trading strategy.
The goal is to minimize risk by helping you identify when to enter and exit a trade and when to abandon a losing trade.
Plan Your Trade, Trade Your Plan
One of the reasons why too many traders worldwide fail to understand that trading is a high-level profession is because of the low entry barriers. But to be successful at it, one should study the ins and outs of trading on platforms like Binance Academy and put in countless hours of practice.
Just like a doctor needs four years of undergraduate study, four years of medical school, and an additional three to ten years of surgical residency and fellowship at a hospital to become a surgeon, a trader needs a lot of preparation to become successful.
Anyone serious about trading should put a lot of emphasis on risk management, which begins with a proper trading plan. The idea is for you to clearly understand your entry point, the size of your position, and where you’ll place your take-profit and stop-loss orders before you even enter a trade. Essentially, a trading plan will help identify high-probability setups that align with your strategy.
The following four-step checklist is an example of what you can do to determine whether the setups you’ve identified offer good profit potential for the risk you’re willing to take.
Step 1: Identify Trade Setup
You should understand the conditions needed for a favorable outcome before entering a trade based on your trading preferences.
Whether you prefer to trade candlestick patterns, chart patterns, trendlines, or even technical indicators doesn’t matter. What matters is that you have a technical reason why you want to enter a trade – and that technical reason is the trade setup you have identified.
For instance, a trader who relies on candlestick patterns to anticipate price direction and momentum might wait for an inverted hammer candlestick to form in a downtrend on the daily chart to predict a bullish reversal.
Regardless of your trading preferences, you need to identify a trade setup that aligns with your strategy before opening any long or short positions. If a trade setup hasn’t developed yet, there shouldn’t be a reason to trade. If you have a technical reason for trading, proceed to assess the triggers.
Step 2: Assess Trade Triggers
After identifying a proper trade setup, you need a trigger that indicates it’s the right time to open a long or short position on a given cryptocurrency.
Some traders prefer to enter a trade upon the break of resistance, while others like to wait for a pullback into support. These events can be considered triggers that separate high-probability trading opportunities from the usual price fluctuations in the cryptocurrency market.
For instance, cryptocurrencies tend to retrace to an ascending triangle’s X-axis each time they break out of this bullish chart pattern. A trader who understands such price behavior may attempt to wait for that potential pullback to enter a long position.
By assessing the triggers, you can always know in advance where your entry point will be, regardless of the volatility in the cryptocurrency markets. It’ll also give you enough time to determine the size of your position and set up take-profit and stop-loss orders before you even enter a trade.
Step 3: Determine Position Size
Regardless of your portfolio’s size, you still need to exercise proper risk management to avoid considerable losses.
Most traders clearly understand their account size, which helps them determine how much capital can be allocated to a particular trade. Likewise, you should decide what percentage of your available capital you’re willing to risk on a single trade.
A well-known investing strategy called the 2% rule suggests that traders should not risk over 2% of their accounts on a single trade. This trading style typically involves entering only a few longer-term positions.
Still, you should adopt the 1% rule instead due to the high volatility of the cryptocurrency market. This rule dictates that you shouldn’t risk more than 1% of your available capital in a single trade. If your thesis is wrong and your stop-loss is hit, you’ll only lose 1% of your trading account.
For instance, a trader with 5,000 BUSD as trading capital and risks only 1% can’t lose more than 50 BUSD on a single trade. But let’s say that the invalidation point for the trade setup identified is 5% from the initial entry. To calculate the position size, one needs to multiply the account size by the account risk and divide the result by the invalidation point.
position size = account size x account risk / invalidation point
position size = 5,000 x 0.01 / 0.05
1,000 = 5,000 x 0.01 / 0.05
The position size for this particular trade will be 1,000 BUSD. But if the invalidation point were 10% from the initial entry, then the position size would be 500 BUSD.
Be aware that losses are expected and are highly likely when it comes to investing. Even professional traders aren’t always right – but having a proper risk management strategy will ensure that winning trades are more significant than your losing trades.
Step 4: Set Up TP/SL
Every trade requires an exit point, so setting up take-profit and stop-loss orders is one of the most important ways to mitigate risks and keep your emotions in check.
Take-profit orders are usually placed in conjunction with stop-loss orders, so you don’t have to worry about executing a trade or second-guessing your decisions. Binance Futures lets users place TP/SL orders simultaneously to help traders insulate their decision-making from emotional influences.
For instance, if a cryptocurrency moves toward your target, the take-profit order will be executed to close the position for the anticipated gains. On the other hand, if a cryptocurrency moves against your thesis, the stop-loss order will be executed to close the position for the anticipated losses.
With a well-defined risk-to-reward ratio, you’ll be able to know what to expect from each trade setup you have identified, even before entering any positions.