In this way you develop a risk yield ratio for trade strategies
The world of cryptocurrency trade is known for its high volatility and quick market fluctuations. With the potential rewards, many dealers are attracted to this fast -moving and often unpredictable environment. However, the development of a successful trade strategy in this environment can be a challenge without proper risk management.
A crucial aspect in building a profitable trade strategy is understanding how risks and rewards can be reconciled. A good risk income ratio helps your business be managed with caution and at the same time receive the potential for significant profits.
What is a risk income relationship?
A risk income ratio is a calculation with which the potential return of a trade is assessed compared to its associated risk level. It is expressed as a percentage or in relation to the leverage (e.g. 1:10). A higher reward requires less risk, while a lower reward requires a higher risk.
For example, if you act with $ 100 and your strategy results in an expected profit of $ 200, your risk yield ratio is 2: 1. This means that you can expect for every dollar you invest that can expect that Up to two US dollars will be made, provided that the market is moving in its favor.
Understand key components
In order to develop a risk reward relationship, several key components must be understood:
* Position size
: This is the amount of the capital that has been assigned to every trade. A larger position size increases the potential profits, but also increases losses.
* Stopless and take-profit values : These are crucial for the treatment of risks and the determination of limits for potential losses or profits.
* lever : The ratio of your account balance to the amount used for retail. A higher lever can increase the returns, but it also means higher risks if they are not careful.
Steps to calculate your risk mode ratio
- Determine your position size : Decide how much capital you want to assign to every trade.
- Fixed your stop-without and take-profit level : Determine the minimum price to which you leave a loss or the maximum level of profit you want to achieve.
- Calculate your potential reward : estimate the profit amount that can be achieved per risk unit.
- Create a table with a position size, stop loss and take-profit levels : Calculate how many risk units are required for every trade based on the steps mentioned above.
Example
Suppose you act cryptocurrencies and want to build a successful strategy. They decide to start with $ 100 in their account.
Position size: 10 units (100/10)
STOP-LOSS level: Sale at 20 USD (assuming a risk mode ratio of 2: 1)
Level of granting: buy back at $ 40 (assuming a further ratio of 3: 1).
Calculate the potential reward per risk unit:
- Position size x risk return ratio = potential reward
10 units \ (100/10) \* 2: 1 = 20 units
10 units \ (100/10) \* 3: 1 = 30 units
As you can see, this strategy requires a risk reward ratio of approximately 6.5: 1.
Tips for developing your risk mode ratio
To create an effective trade strategy:
- Start with conservative positions and gradually increase the size when your experience improves.
- Insert the clear stop-without and take-profit values to manage the risk.
- Carefully monitor your trades and adapt the position size, the stop or take-profit level as required.
By developing a good understanding of the risk reward relationships and creating a well-thought-out strategy, you can increase your chances of success in the world of cryptocurrency trade.