Disclosing my trading Method: Probably the most important parameter on a trade

in HODL2 months ago (edited)

Yesterday I already determined how much of my investment in Crypto I dedicate to what I call Short-term trading.

In case you don't want to read the post I'm referring to, I'll make it easier for you by telling you that only 10% of my capital is dedicated to trading on Binance[Futures].
But, as I already explained, I NEVER use that full 10%. In fact, it is very rare that I ever use a quarter of that portion of capital.

Using that capital in full would ensure an absolute loss of it, believe me.

Regardless of whether you are the best technical analyst or your fundamental knowledge of technology is extremely excellent, if you play it all, sooner rather than later you will lose EVERYTHING, and when this happens, discouragement and frustration will hit you so hard that you will never trade again thinking, normally, that the game is rigged.

And yes gentlemen, sometimes the game is rigged and the bank will always want to win and is waiting us, excited and naive traders, to act as much emotionally as possible. But, let me tell you that, knowing this, the fault is always and solely ours.

It doesn't matter that your 10% dedicated to short-term trading is only $100, you are going to lose it for SURE if you don't use it properly.

There is no trade without risk, in fact, the concept of risk and opportunity are the most important things to consider in a trade.

Therefore, it must be taken into account that this 10% of the capital destined for short-term trading has to be used as a balancing tool with which to manage the risk of each trade.

And how much of that capital is it considered advisable to use in a position?

Well, the answer could be derived in turn by answering a more important question...

How much would you be willing to lose if the trade doesn't work?

Let me explain you by an example.
Let's say that your capital is $100 and you have already identified a good entry in the ETHUSDT pair, such as the following, an ascending Triangle.


You decide to just enter the upper resistance since the typical expected price projection at the breakout of this continuation pattern is 20% higher.

You quickly calculate where it would be invalidated and plan your STOP-LOSS in advance.

The REWARD:RISK ratio of 5.5 is incredible and you don't think twice, you open a long with 20% of your capital ($20) and with a leverage of 20% with which the expected profit is + 400%, ie $80...

Unexpectedly, the pattern is invalidated and the price quickly collapses activating your stop-loss, located 3.8% below your entry price...


But remember, the leverage is 20% with what you are actually losing 3.8 x 20% = -76%, ie 15.2$ lost if you have had time to stop the steep decline at the planned point, which is not always the case.

Now think for a moment that you have a losing streak of 3 consecutive losses, which is not unusual. Your total stake is now $54.

Finally you find another similar good opportunity, having half of your capital and having chained 3 consecutive losses, you risk even more and enter a position with 30% of your remaining capital, $16 and equal leverage.

The trade is going well and you close at the expected target, 200% profit... getting $32, great !!!

Final result, your current capital is $86, you have lost 14% but it could have been much worse...

In crypto, sudden price swings of more than 20% are not uncommon, especially if you are trading shitcoins or low cap cryptos. Your shitcoin can easily go -95% in the blink of an eye.

In fact, if you search the internet a bit, the most successful traders tend to have a Hit Rate coefficient (nr of wins over a period of time) not far from 50% which means that they only "win" in 50% of the trades. And if so,how the hell do they make money, you might ask?

The answer is obvious, limiting the risk to the maximum.

Below I put a detail of my historical data of the last 90 days of trading:



As you can see, I have a "Cumulative Profit" of 183% but more importantly, my "WIN RATE" (or "HIT RATE") is 70% and my Profit/Loss ratio is 1.4 which is not fantastic but sustainably fruitful.
Even so it would be if the Profit/Loss ratio were 1 because 70% of my trades are successful.

Can you be successful with a lower "WIN RATE"?

Obviously yes, limiting the risk. You just need to put more effort into your search for good trading set-ups and always ask yourself how much you are willing to lose in proportion with your current capital.

What amount do I think works reasonably well?

Unfortunately for me, I am quite a conservative person when it comes to facing risk. I know that there are people who take so much risk that they eventually reap extraordinary profits in a single trade.
I recently read about a person on Twitter (https://twitter.com/warobusiness), which I follow, who a few weeks ago managed to convert $10,000, which was his total capital, into $1M and there has still not been an explanation of how he did it but I'm sure that he risked the maximum (x200 leverage and all the capital).
Actually,he won the lottery therefore although, in my opinion, he proceeded like a true gambler by surely going ALL-IN on his bet.

You can see the video of his interview in this Tweet:

I never play the lottery, not even the traditional lottery, I don't like gambling games although I recognize that being a trader has a fairly high component of gambler as well.

I base most of my positions and strategies on technical analysis and I do not hesitate to close a position in losses even if it costs me emotionally speaking.

Given my degree of aversion to risk, a component which everyone has, and my experience in trading, the percentage that I am willing to use in a single trade on my available capital NEVER exceeds 5%.

In fact, if on what I am entertaining are in "scalpings" (Scalping involves making tenths of trades daily in which positions are held very briefly, sometimes just seconds; as such, profits are small, but the risk is also reduced.), it is not uncommon for even this percentage to be less, typically 2 to 3%.

5% has become a rule for me, no matter the leverage

It is part of my Trading profile, I don't risk further than 5% even if my WIN RATE is 70%.
Having a high win rate doesn't necessarily mean a trader will be successful or even profitable, as a high win rate means little if the Reward-Risk is very low, and high Reward-Risk ratio may not mean much if the win rate is very low. However, both variables have been in my favor the last 3 months.

Remember, when you trade Crypto there is another variable to control in comparison with stocks trading, the VOLATILITY. It can be so high that just 1 trade can screw your complete stake if you don't put limits and the 5% RULE is the most important one.

Other Post you may be interested regarding my Trading methods:

Disclosing my trading Method: How much I dedicate to short-term trading?


*Disclaimer: This is just my personal point of view, please, do your own assessment and act consequently. Neither this post nor myself is responsible of any of your profit/losses obtained as a result of this information.