We all agree that trading cryptocurrency is usually not a straight-forward business. With its topsy-turvy nature and the volatility of the market, trading digital currencies are inherently risky. A profit today is not guaranteed tomorrow. As such, traders who want to be successful must develop specific skills in order to stay ahead and trade smart. One of such skills a trader must hone, among many others, is money management skills. This will enable the trader to stay disciplined and armed, ready with a plan to manage loses when they come. This requires some discipline and following specific rules in the trading process.
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In this article, we examine the major disciplines and rules that will enable a trader to develop money management skills.
Have a Trading and Money Management Plan
The first step to developing a good money management lifestyle is to have a trading plan and a money management strategy that you will stick to irrespective of the circumstance. All of the disciplines and rules that a trader needs to be successful in money management is encapsulated in identifying and sticking to that plan.
A trading plan is slightly different from a money management plan. While the former is your strategy to make a profit from your trade, the latter is the skill needed to make sure that your profit is kept safe and reinvested wisely back into trading.
Successful traders combine both of these aspects and ensure that they follow it in every trading situation. This helps manage emotion based trades and helps to prevent you from over-trading. A plan brings discipline into your trading and gives you confidence and a level of control over your actions while trading.
Even though we recommend that your plan be cast in stone, changes can be made to your plan at the close of trade because a good plan adjusts with market conditions. Concurrently, you plan will also change as your skill level and experience improves.
We recommend that you define your entry and exit strategies clearly before initiating a trade. This will ensure you know when to pull out of a trade—take your gains or cut your losses without being influenced by your emotions. This also is part of your trading plan.
With the above in mind, we shall consider two recommended plans that you can adopt when trading.
Take Part in Trading Contests that Encourages Good Risk and Money Management Practices
By taking part in online trading competitions that ranks winners based on best risk and money management performers, a trader can quickly gain consciousness of responsible trading.
Although this is not a total replacement for trading with live money as psychology differs, it is a first step and low risk way of trading the right way as well as trading as a business. You also get a chance to win a prize for trading the right way.
One of such great trading contests is that organized by Liteforex.com.
Finally, beware of trading contests that rank winners based on highest equity as this sets the traders psychology into a reckless psychology.
Fixed Fractional Money Management
The fixed fractional money management plan allows you to scale up your trade size without exposing your capital to unforeseen risks. In this plan, you manage your trades by setting aside a portion of your trading equity while you trade with the other portion.
As is the case most often, most exchanges usually have a store or wallet on your profile that is different from your trading account. You can have a portion of your money deposited in this account without trading with it—sort of like a save box—while you trade with the other portion.
What this means is that the higher your equity grows, the more funds you have available for trading and the more capital your system can earn, and you have an account buffer that is protected.
Let’s assume you have $10,000 as your initial capital and are willing to risk 30% of it—$3,000. And during the crypto rush of 2017 when the price was $300.00 for one BTC, you bought 10BTC with your $3,000 and made an extra $10,000 as profit after selling. This translates that at the close of the trade your total profit gained will increase your total equity to $20,000, and invariably increasing your trading capital to $6,000 (20% of $20,000). This allows you to grow and secure the rest of the money in your vault, which is separate from your trading capital while also growing your trading capital at the same time.
Anti-Martingale Money Management
Suppose you experience a streak of losing trades on your account, this plan suggests that you reduce your risk while you are in a losing position, and increase your trade size as your capital comes out of drawdown. This is a safer way to trade as it allows your capital to stand the test of time and ware out the storm until the profits period shows up.
While it is not guaranteed that these strategies work all the time, a traders chances of success are based primarily on their skill, experience, and system of winning and losing. Be consistent. Stay vigilant to the market charts and analysis. Be objective. With practice you will reach your goals.
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