Fundamental analysis and technical analysis are analytical skills for investment transactions, but can you make money in the market with them? The answer is of course no, because any analytical method is uncertain. Analysis only gives a reasonable explanation to the market, but where the market will go depends on the market. There is no 100% correct analysis in this world. If there is, it is a lie. Therefore, minimizing the losses caused by wrong judgments is the secret to successful trading, so risk management came into being. Risk management is often composed of two parts: profit and loss ratio and position management.

Profit and loss ratio

If we want to turn the trading expectation into a positive number, that is, to realize the possibility of profit in the future, then our expected profit must be greater than the expected loss, that is, the profit-loss ratio must be greater than 1:1. In real transactions, due to factors such as spreads and time costs, our transactions are required to maintain a profit-loss ratio of at least 1.5:1. For some orders with longer time periods, professional traders generally control the profit-loss ratio to more than 3:1, because the longer the time period of the transaction order, the greater the time risk, so the relative profit-loss ratio will also be required to be greater.

There is no simple constant requirement for the profit-loss ratio. Generally, the longer the time period, the greater the profit-loss ratio requirement. However, the minimum requirement should not be less than 1.5:1.

Position Management

Position management is the top priority of risk management.

The basic idea of ​​position management is to increase the tolerance of funds and give yourself the opportunity to make mistakes.

First of all, we need to resolve a misunderstanding, which is the impact of leverage on profits and losses. Many people believe that high leverage means larger profits and losses, and low leverage means relatively smaller profits and losses. In fact, this view is wrong, because leverage only affects trading margin, and the amount of trading margin does not affect the tolerance rate. If you use 100x leverage to trade 1 BTC and 3x leverage to trade 1 BTC, and lose $100, the amount they lose is the same.

What really affects the amount of your loss is how many BTC you have, not the leverage. Therefore, when managing positions, we limit the number of BTC. We can make a reasonable error tolerance allocation based on our own funds so that we can use funds more efficiently and make a small investment for a big gain, instead of tying up the funds and failing to fully utilize them, which will eventually lead to a loss.

For example, if there is $10,000 worth of BTC, we hold a margin of $1,000. With a leverage of 100 times, we usually control the capital utilization rate to 3%-5%, that is, open 0.3-0.5 BTC instead of 3-5 BTC. The essence of leverage is to make a small bet for a big gain, not to gamble with a big gain. The reason why many contracts are blown up is not because of the use of high leverage, but because of the margin ratio used for high leverage. Of course, the most important thing is that the contract must have a stop profit and stop loss to strictly control our greed and discipline!

The above are some suggestions on how to effectively manage risks and successfully complete cryptocurrency transactions!

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