Trading can be a very interesting adventure, especially when you’re winning and everything is going as planned. But what happens when trades start to go against you and you start loosing.
Do you start staring endlessly on the screen, have a headache, or grow completely unhealthy? If you say yes to any of these symptoms then you’re currently overleveraging and trading with high position sizes.
Below is the medicine that will help you out:
1. Proper position sizing or sizing your trade well will help you
If you’re trading and you can’t sleep at night then something must be wrong(either high leverage or position size). So you need to start reducing the size of your position relative to your trading capital(TC). This is called position sizing.
If you trade with a TC of $100, your maximum trade size should be $5(5% of your capital), that way you get the opportunity to place many trades before you lose your entire capital.
Losing your entire trading capital(let say $100) on a single trade is not acceptable. It’s a sign of poor risk management and it shows you chose to overlook the possibility of losing your trade, which is very high and always there.
In fact, nothing is guaranteed in trading. Nobody can just predict the future with full certainty and timing. If at all you’re right with the prediction, you may be wrong with the timing.
So in order to avoid losing big to gallant and unnecessary predictions, always size your bets wisely so even though you lose the trade, only a small part of your capital is lost.
2. Adjust your trading leverage if it’s too high
Don’t tell me you use high leverage of like 30x to 100x on a daily basis.
What you must know is that using a 100x leverage means that you will lose the trade if there is a 1% price change against you from where you enter the trade. And in a highly volatile market like cryptocurrency which as average daily volatility of 5%, this means you should be ready to lose the majority of your money if you’re strictly using 100x leverage.
What you can do is to reduce your leverage to 5x. Using that means you will need a 20% price change against you in order to lose your trade. Such a price movement is usually rare, and you could avoid losing big by further placing a stop loss at around 10% price change from your entry. The stop loss is far enough and it won’t easily be triggered.
3. A stop loss is always necessary, so use it.
A stop loss is like a fire extinguisher. You just need to keep it by your side even though you don’t know exactly when there will be a fire outbreak.
It’s your insurance against losing all your trading capital. With a stop loss, you get to lose only a fraction of your capital on each trade.
Besides, make sure there is enough breathing space between your entry and stop loss. Otherwise, it will be triggered frequently.
If you like to have a proper sleep and good health while trading, then you need to make sure you size your trades well while using low leverage (maximum of 5x) and a stop loss.
What do you think? Feel free to give it a try and leave your experience in the comments below.
I look forward to hearing from you.
PS: It’s easier to read, said than to get it done. You have to make sure you keep it to practice.
PSS: If you follow through with this and do the right things in trading, you might not make money now but you will make money in the long run.
Also, read the 9 mistakes I made when I started trading and investing.