The basics of risk management in trading

A position size calculator / risk is at your disposal on this page as well as directly in the strategy.

Having a good strategy is essential, and you've got it now. its overall risk management strategy is a fundamental element in making your trading profitable in the long term, and it's always painful to learn from a costly mistake.

One of the advantages of scrupulously following a coded, backtested strategy is that it frees us from psychological bias. Properly set up, the strategy is profitable and mistakes are avoided. The advantage is all the greater when the strategy and all our trades are fully automated.

In this chapter, we'll look at three main approaches that can be applied, with their advantages and disadvantages, so that you know how to approach your trading holistically, with an overview and good Money Management, i.e. conscious risk and parameters, without surprises and assumed.

The analyses and proposals presented here are based on our extensive research into these strategies and the best way to proceed.

 

Remember that whatever the results of the past, the future can be unpredictable. Just because a strategy has worked perfectly for years doesn't mean that an extraordinary or unforeseen market fluctuation that results in losses can't happen. Risk management and conscious personal choice should therefore remain at the forefront of your mind. We are sharing with you the results of our own practice, but we do not provide investment advice, and you will always be responsible for your own trading. In fact, if you've never traded cryptocurrencies before, we recommend that you always start with a €50 account, and that you begin with a small amount while you check that everything is in place in terms of setting up your strategies and their means of execution. Once everything is up and running smoothly, you can adjust the capital invested and any leverage you choose. 

Maximizing risk-free or maximizing profit?

The amount of profit that can be generated by trading with a strategy depends on several factors:

  • The quality of the strategy: The number of winning trades per year, essentially as well as their profitability
  • Select leverage : By virtually multiplying our capital, we can earn more but also lose everything.
  • The proportion of our total capital that we play each time we enter a position A single position at 100% of capital yields more than two or three successive positions at 10% each (but the risk of loss is much greater).
  • Long-term quality of selected assets The more an asset is capitalized, the more reasonable its downward volatility will be, thus avoiding surprises.

All you have to do is decide the level of benefit/risk you're ready to play.

Let's take a closer look at each of these factors to help you make the right choices for your overall approach and money management.

a) The quality of the strategy

In our case, the question is settled: TopBot Anomaly really is a very good, stable, safe and relatively predictable strategy. It's profitable and relatively stable over time, provided it's applied with discernment. Discernment is what this training course is all about, to support you in your trading. A strategy can be considered quality if its backtesting is conclusive, taking into account various factors such as spread and fees in particular, which is our case here.

b) Selected leverage

Using leverage (in FUTURE, with a broker) is a way of earning much more by committing our capital in a more significant way. Leverage is a kind of instant bank loan, for which the broker pays himself "on the beast", i.e. he will liquidate your position if the insolvency threshold of your account is reached, in the event of an unexpected market movement against your position.

Leverage x2 means that 1000 $ are played as 2000 $

  • You earn more if you earn
  • If you've opened a LONG position and the price falls by half, your position will be liquidated, i.e. recovered by the broker for whom you were contracted to the tune of 2000$. A 50% drop in value, especially with a strategy already triggered after With our strategy, the risk of being liquidated with x2 leverage is low to very low, except perhaps on crypto-currencies that are too new or under-capitalized.
  • If you use x10 leverage, 1000$ becomes 10,000$ invested, but if the price moves against you by more than 10%, your entire position is liquidated 5% with x20 leverage.

As far as TopBot strategies are concerned, we advise not to exceed a leverage of x2 in order to maintain proper risk management. Higher leverage increases risk considerably and should only be used by traders who are experienced with the strategy and know when and why to use such leverage.

If, with regard to the question of leverage, you are don't want to take any risksWe advise you to play only with your capital, using x1 leverage. Your long positions will never be liquidated, even if the price were to fall sharply (often very temporarily, in the form of wicks, before rising again).

If you want reasonable risk, x2 leverage allows you to double your investment with low risk. A cryptocurrency would have to

lose around 60% of its value in just a few hours, only to be liquidated. This situation is uncommon, although not to be entirely ruled out, in the event of an exceptional political situation or an event that disrupts an asset or the markets as a whole.

If you want to bet more, carefully analyze the asset history applied to your strategy and assess for yourself the level of risk you're willing to take.

We recommend x1 or x2 leverage as your first money management parameter. 

c) Proportion of capital at each position entry

Although they may seem related, managing leverage and managing input type in position are two different questions.

One of the main levers for controlling risk is a gradual entry into position. This progressive input allows you to cushion and even cancel a larger-than-expected fall. This is what the Pro version offers, with its 10 possible entry levels.

The TopBot strategy works with one, two, five or ten entry levels. The smoother the entry levels, the lower the risk and the higher the return. Our "En bon père de famille" proposal, at the bottom of this module, uses maximum risk minimization with maximum smoothing and entries at just 10%.

Single entries offer very high profitability per trade, and although they are very profitable in the long term, the risk of loss is increased and you have to accept that your account may sometimes fall sharply, even if this is a transitory phase and long-term profitability is assured. This psychological aspect should not be underestimated, as a bad trade can always happen and take several months to make up for.

If you want to play aggressively, start with small amounts and carefully observe the behavior and evolution of your strategy. Playing with risk and rapidly building up a trading account can be exciting, but you need to be aware of the risk of heavy losses, should a single exceptional event disrupt the markets. 

d) Asset quality

Asset quality is not one of the most decisive factors, but it can have an influence. To give you the full picture, we'll say a few words about it.

Visit volatilityThis is the element on which our strategies are based:

  • Too little volatility means few price anomalies and therefore few trades. However, it does mean a certain stability of the asset over time, and reduces the risk of a massive price drop not anticipated by the strategy.
  • Too much volatility (usually synonymous with too little capitalization) increases the number of profit opportunities, but also means that major price falls must be considered as possible.

Visit volatility of an asset and its capitalization are intimately linked. The more capital an asset has invested, the more difficult it is to move its price quickly, since the number of players is greater, as are the sums invested (barring a major systemic crisis, Bitcoin will never lose 50% of its value in a few hours, for example, although declines of up to 15 or 20% have already been observed.

A small-cap (often young) asset, however, will experience much greater volatility, as the number of players is much more limited, and all it takes is for the largest of them to decide to sell at the same time for price falls of the order of 30 or 40% (exceptionally more) to occur.

Since we want to manage risk as much as possible in our trading, we look for assets with a low volatility. mastered, i.e. whose historical falls do not exceed 25 or 30% in a few hours, thus limiting the risk of a market movement. that would not be anticipated by our strategy and could cost us money.

The most advanced traders can also take into account the soundness of long-term projects because a "ShitCoin" is more likely to have a lasting price collapse, and although our strategy is not based on the general market trend, excessive price collapses are likely to put a strain on our profitability.

Strategies and key principles for managing trading risks

Trading, particularly in volatile markets such as crypto-currencies, is a field that combines opportunities and risks. While the potential gains are attractive, it's essential to understand and manage the risks to avoid irreparable losses. Here's an exploration of the essential concepts to consider for success in this complex environment.

50% of loss means 100% to reassemble

In trading, unless you want to play "casino", it's essential to manage your capital and risk before looking at expected profitability.

Preserving capital is more important than earning a lot quickly.

In fact, a loss of 50% means 100% of gains to be made afterwards to get back to the previous level (if I lose 50% of 1000$, I then have 500$, I'll need a gain of +100% to get back to 1000$).

By authorizing a maximum loss per trade (between 0.5 and 2%), we limit the risk of major DrawDowns, meaning that our capital can absorb several consecutive losing trades without being overly affected.

When setting up our strategy, we'll therefore be sure to take into account possible losses and their influence on capital before looking for quick and dangerous profits.

When you have no capital, you can no longer trade

What beginner trader hasn't had a trading account completely liquidated or suffered such losses that it was no longer possible to continue trading?

Your capital is the basic element of your trading and you need to take care of it, because without it, you simply won't be able to earn anything. Considering risk is fundamental to your overall trading strategy.

There are always times when the market is unpredictable, so there are always losses.

The laws of statistics are as follows, 100% of winning trades is impossible even if the settings and backtesting of your strategy show that this has been the case in the past.

"Past results are no guarantee of future results".

So always consider the "worst case scenario" when setting up your capital management, and plan to be able to absorb losses or a sudden market downturn.

Greed and lack of patience are the trader's first enemies

It's tempting to bet big to win big, but in the long run, you could end up biting your fingers off. What's the point of an account that rises quickly and then, one day, due to a rare statistical reversal, is completely wiped out?

So think of trading as a long-term activity, to be approached with patience, and move away from the spirit of greed and the attraction of quick profits towards that of the rational investor who will always act to protect his capital and trade "as a good father".

Maximum loss of 2 % per trade (see 1%) is strongly recommended

The drawdown calculator allows you, on the basis of your stop-loss or the worst historical trade in your backtest, to anticipate the biggest possible loss and limit your exposure.

  • For prudent capital management, the maximum loss per trade should not exceed 0.5% of your total capital.
  • For balanced management, the maximum loss should not exceed 1% of your total capital.
  • For aggressive management, the maximum loss should not exceed 2% to 3% of your total capital.

If you risk more, it's at your own risk, as a string of consecutive losing trades is always possible, and you need to preserve your capital at all costs to be able to continue trading.

If you really want to take a big risk (with a very small account and money you're prepared to lose, for example) it's quite possible, with a well-adjusted strategy, to earn a lot more quickly and sustainably, but in this case be aware that your risk is very high. and don't delay with leverage to avoid at least the risk of being completely liquidated. 

Smoothing risk with multiple bots: Principle and limits (including crypto correlation)

We don't want a bad trade to dent our capital too much, so we manage the risk we take on each position we enter.

Since, as a result, we enter positions with small amounts of our capital for each trade, we're not working our money to its full potential. How can we increase our profit without increasing our risk too much?

Use multiple trading bots on the same account but configured on different cryptos!

This increases the number of trades, and therefore the time our capital is used, without increasing risk. per trade and per asset.

In this way, capital utilization is increased, while risk is smoothed out to some extent.

There is a limit to this method: most cryptocurrencies are closely correlated to Bitcoin. and in the event of a massive fall in Bitcoin, most of your strategies could record losing trades at the same time. Integrate this parameter into your set-up, by looking for cryptocurrencies less correlated with Bitcoin than others, or by not multiplying the number of your bots too much, for example.

Advantages and risks of using leverage

Leverage is both an opportunity and a great danger. It means being able to "multiply" the size of your position, and therefore your gain in the event of a positive trade, or your loss in the event of a negative trade.

The main advantages of using leverage are :
- The ability to take advantage of very small price variations on a market
- The possibility of betting more than your capital
- The possibility of mobilizing smaller shares in its capital (so that the remainder is available for other position inputs, for example).

The main (and significant) risks of using leverage are :
- Big losses in the event of a loss
- Full liquidation of the account if the liquidation price is reached.

Account liquidation means that your account falls to 0, because you no longer have the money available to cover your "loan" (leverage is a kind of loan).

Note the following generalities:

  • A LONG position with x2 leverage and 50% of price decline will be liquidated (even at around -49%, taking fees into account).
  • A LONG position with x4 leverage and 25% of price decline will be liquidated.
  • A LONG position with x10 leverage and 10% of price decline will be liquidated.
  • A SHORT position with x2 leverage will be fully liquidated if the price rises by 50%
  • Etc.
  • Exception for SHORTS only: With leverage x1, a short position where the price would increase by 100% would be liquidated.

The "cross margining" option allows you to use the available liquidity in your account to ensure that a particular position is not liquidated when these thresholds are reached, but if you do not have enough available liquidity then your entire account will be liquidated.

The "isolated margin" option allows you to isolate a single position entry, and only the amount invested in this position will be liquidated if the liquidation price is reached. However, this liquidation price will be strictly equal to the figures presented above.

For our TopBot Anomaly strategies that do not use stop-losswe recommend not to exceed a leverage of x2

  • Isolated margin only. In the worst case, you will only lose the % of your capital (excluding leverage) that you have invested in your trade.

Why program a bot with 5% of capital in x2 leverage rather than 10% of capital without leverage and therefore without the associated risks?

In fact, if you're using just one bot for your trading account, we recommend that you don't use leverage.

If you use several bots, using x2 leverage allows you, with a reasonable risk, to minimize the number of bots. the amount of capital tied up and to better distribute the sums in the case of multiple entries in % of available capital.

 

Let's take an example for a programmed strategy with 3 entries, each at 10% of available capital:

  • The first entry uses 10% of our capital
  • The second uses 10% of the remaining 90%
  • The third uses 10% of the remaining 81%

 

If we now enter with the same final proportion of our capital but using leverage, i.e. 5% per leverage entry x2 :

  • The first entry uses the equivalent of 10% of our capital (5% x2)
  • The second uses the equivalent of 10% of the remaining 95% (5% x2).
  • The third uses the 10% equivalent of the remaining 90.25% (5% x2).

We can therefore enter more times in position and with position amounts closer together. But we are exposing ourselves to the risk (very reasonable with leverage x2) of liquidating our position by the very fact of using leverage.

Starting with a small account (€50) is essential, as is analyzing your losses.

When you're just starting to implement your strategies and manage your capital, we always recommend starting with a very small account (€50 is enough) for one to six months.

You're sure to avoid mistakes:
- Set-up techniques
- Risk assessment
- And you'll work on your patience and be able to study your strategy until everything is in place with limited risk.

In conclusion, always plan for the biggest loss and factor it into your strategy, and don't be too greedy.

If you follow each of these points and apply our strategy, you'll avoid unnecessary losses and build a healthy, profitable practice for long-term trading and market success.

In conclusion, follow reason rather than emotion or the desire to make a quick profit at the expense of long-term security, and your trading will be profitable for a long time to come.

Happy trading!