Cleo.finance: How to avoid crippling losses when trading?

[thecryptogandalf]

Hello everybody, here is an article about position sizing, and here is its quick summary(Full Article on cleo.finance blog):

Position sizing is determining the correct size of the position based on the amount of money you risk on the particular trade.

Before you can do that, you need to figure out what is the maximum acceptable risk of the trade.

That risk is usually expressed as a % of your balance, that you are willing to lose.

To make sure you don’t lose more than this amount traders set a Stop Loss order which are the real maximum exposure of your position.

If you don’t use a stop loss, you are exposing your entire portfolio!


Where to put a stop loss?

• That’s where Technical Analysis can be handy. Majority of retail traders would look at the chart to find out – usually behind some support/resistance level or based on some volatility indicator, such as ATR

Rule of thumb:

Risk between 1-3% of your portfolio balance on each position. This way any single individual loss won’t wipe your account and break your spirit. And more importantly, even a string of losses will leave you with enough ammunition to recoup the losses.

Have a clear approach to risk:

• Set a risk limit for each trade, asset in general, day, week and month (you won’t risk more than X account)
• Determine the right position size and start small
• Increase the position size of trades slowly if your account grows
• Lower size or switch back to paper trading if your account doesn’t

Two types of position sizing methods: Fixed and flexible

Fixed position size

• Using the same position size for every trade
• Good for finding out if your strategy has an edge
• Make sure you come back and reevaluate position size periodically.

Flexible position size

• Using a percentage of current balance
• Cluster of wins makes every following win larger
• Cluster of losses makes every following loss smaller

How to calculate the correct position size:


You need to know

• Trading account size
• Acceptable risk (in % per each trade)
• Invalidation point (in form of a distance from the open price)

The formula:

Position size = Trading account size x Acceptable risk / Invalidation

Example:

• Trading account size = $10,000
• Acceptable risk = 1%
• Invalidation point = 4% drop in market price

Position size = $10,000 * 0,01 / 0,04 = $2,500

This way you will always risk losing $100 no matter where your Stop Loss goes! If Stop Loss must be wider, say 8%, the calculation is:

Position size = $10,000 * 0,01 / 0,08 = $1,250

Doubling the distance to our stop loss has us reducing our position size by half to maintain the same possible loss.

How to set position size in the trading platform

• Pick a leverage
• Add a Stop Loss
• Input the market price or the distance in % of the stop loss
  
  • Whichever value you enter first, that becomes the constant – element that won’t change when you edit other variables. You can select different constant by clicking the “target” icon
• Input the Position Size or Margin size while watching the PnL of the Stop Loss
  
  • Increase or decrease the size of the position, until the PnL of the Stop Loss is at the level you want it to be

This way you can control exactly what your exposure is, while understanding all the variables involved. You can even add multiple Stop Loss orders, which can help you limit the exposure in lower conviction plays, such as new set-ups.

The next article will be about Stop Losses.

[sklopan]

Being a trader and trying to avoid losses is a phenomenon that is more than understandable, but very rare and difficult. Do not expect such a solution to the problem.

[hugeblack]

I think your plan will be good in a bear market condition when you can anticipate price movements using points of support and resistance and then build a trading strategy on that basis.

In the current situation, uncertainty prevails, and therefore all the current support and resistance points are psychological and cannot be relied upon. For example, we have stayed for a period of time from $33,000 to $25,000, but they are only psychological levels.
If you put the stop loss strategy at 25k, breaking it does not mean that the price may collapse severely, and therefore the only point we have is the levels of 20k.

In short, the current situation is not suitable for short-term trading, but only for buying.

[Oshosondy]

I think your plan will be good in a bear market condition when you can anticipate price movements using points of support and resistance and then build a trading strategy on that basis.

In the current situation, uncertainty prevails, and therefore all the current support and resistance points are psychological and cannot be relied upon. For example, we have stayed for a period of time from $33,000 to $25,000, but they are only psychological levels.
If you put the stop loss strategy at 25k, breaking it does not mean that the price may collapse severely, and therefore the only point we have is the levels of 20k.

In short, the current situation is not suitable for short-term trading, but only for buying.

Trading strategies is still working very well, even now is more favored as bitcoin is not going beyond $28000 and $32500. The use of leverage is the failure of many. Assuming I open a long position at $30000 with 1x and I have liquidation price of less than $1. If bitcoin get to $25000, I will increase my leverage to 2x, the liquidation will be around $12500 and I will still have rest of mind. The price to make profit will change from $30000 to around $27500.

What I just know is that trading is beyond what someone can write or post, experience matters too. It is in OP that stop loss is good, but I did not even make use of stop loss, I only make use of take profit.

[palle11]

What I just know is that trading is beyond what someone can write or post, experience matters too. It is in OP that stop loss is good, but I did not even make use of stop loss, I only make use of take profit.

That can work with low leverage and if you taking very small risk. You therefore probably making use of very minimal leverage like you mentioned otherwise you can't have that kind of peace. Some other times but not all the time, the market price and direction can change against you even at low leverage. You said it about experience, it is very important in trading.

[Oshosondy]

That can work with low leverage and if you taking very small risk. You therefore probably making use of very minimal leverage like you mentioned otherwise you can't have that kind of peace.

I started using low leverage because if the market is against me, I do close position opened because of fear of liquidation and later the price do correct back. I see the market moving in both side ways and low leverage can be good for bears and bulls if the market is studied very well with indicators and risk management.

Some other times but not all the time, the market price and direction can change against you even at low leverage. You said it about experience.

I can use leverage if need be, I prefer to begin trading with 1x, if my analysis failed and the market go against me, I wait for a time for indicators to signal me to go 2x, I can do it up to 3x max. This helps the chance to gain back the money as fast as possible if the market later go in your direction taken. 3x for bitcoin, not altcoin. Using 1x is not that risky but it can result to panic too if the amount used is very high, so trade with the amount you can afford to lose.

[Johnyz]

What I just know is that trading is beyond what someone can write or post, experience matters too. It is in OP that stop loss is good, but I did not even make use of stop loss, I only make use of take profit.

That can work with low leverage and if you taking very small risk. You therefore probably making use of very minimal leverage like you mentioned otherwise you can't have that kind of peace. Some other times but not all the time, the market price and direction can change against you even at low leverage. You said it about experience, it is very important in trading.

Not all traders have this cut loss setting, some are just ok with the risk and whatever the result of their leverage, they are ready for that. For to some traders who are still not familiar how this market works, I think having a cut loss setting is not a bad thing, it can limit your losses and most probably save your capital. I do still have this cut loss level, and its working fine with me, having your own strategy is also a big thing here.

[lalabotax]

Where to put a stop loss?

In my opinion, Setting a Stop Loss is one of the important elements moreover done by daily traders. This is done to avoid more losses and move to another trading pair again to gain more profits. So, the recent profits can cover the loss that we have in advance. But, if this is for long-term investment, especially for top coins like Bitcoin, we may not need to set a stop loss because we are not in immediate trades.

How to calculate the correct position size:

Will this really work on every trading strategy?

When I see the trading leverage use, well, this may be interesting more, because we can gain much more profits on it, but also high risks to face. That is why more calculations, strategies, and smart decisions to take the position will be very crucial to combine.

[jossiel]

Will this really work on every trading strategy?

We're all different traders and I think it will work for the others but if it doesn't work for someone, he has to find another strategy that will make it for him.

Not all strategy works perfectly to everyone.

But it has to work if you execute and properly done. Like the traders I know personally, they don't put stop loss and they're more than a risk taker than me.

[Next-door]

If you want to trade, you have to follow some rules first. That is to use Stop loss
If you are a trader then you must use stop loss in all trades. Because the market is not always the same. And for a good trade you can go to the link below and wear it.


Link : Some essentials for a trade

[palle11]

If you want to trade, you have to follow some rules first. That is to use Stop loss
If you are a trader then you must use stop loss in all trades. Because the market is not always the same. And for a good trade you can go to the link below and wear it.


Link : Some essentials for a trade

Footnotes

Trading is a tough job - there's no denying it. But the most important thing is that trading is a subject that can be learned through training and practice.

I thought you are the same account that posted on the thread link you dropped but no , it is another account from that page name BIT-MASTER.

However I have to say from the footnotes that despite all the reading of document and videos about trading, if we don't practice to understand the market and the way TA works with indicators and master our own strategy then we keep losing. Trading is practical not theory.

[sklopan]

I think that in this case it is important to pay attention to experience. At least, I think this is a very important aspect.

[Silberman]

Without a doubt the best way to reduce the chances of a massive loss is with the use of a small position size and a stop loss, however this is something which limits profits and since the main goal of traders is to obtain profits then a great deal of them do not like either of those two concepts, which means that even if they can obtain huge profits if they happen to be using leverage when the market crashes their losses can be monumental to the point they could even get a margin call simply because they made a mistake when reading the charts while they were not using any method to protect themselves from massive losses.

[ReiMomo]

Good calculation though. But not sure if this will help in gaining more profits but yes obviously we can save from loosing much. I tried it often but at last I had to give up since I invested on a long term trade. After loosing much in last 5 years, decided to go with long term trades. Patience is indeed needed for it. Choosing the right coin and keep watching its growth would really satisfy you. Buts yes, need to keep watching the market. The market might fluctuate at any direction and we might have to adjust our trade accordingly.

[Hamphser]

Without a doubt the best way to reduce the chances of a massive loss is with the use of a small position size and a stop loss, however this is something which limits profits and since the main goal of traders is to obtain profits then a great deal of them do not like either of those two concepts, which means that even if they can obtain huge profits if they happen to be using leverage when the market crashes their losses can be monumental to the point thy could even get a margin call simply because they made a mistake when reading the charts while they were not using any method to protect themselves from massive losses.

Small position size is recommendable or something which you could really able to accept out whenever you do lost certain trades but we know that as long you wont really be able to panic sell then you could always be

having the chance on recovery thats why i isnt really that bothersome when you are really that tending out to make some trades.Losses are inevitable but making yourself doing the best on minimizing that risk
then its up to your choice or on how you would gonna make it.

Minimize mistakes as much as you could even though this sounds not simple but its not impossible for it to be done.

[AmoreJaz]

Will this really work on every trading strategy?

We're all different traders and I think it will work for the others but if it doesn't work for someone, he has to find another strategy that will make it for him.

Not all strategy works perfectly to everyone.

But it has to work if you execute and properly done. Like the traders I know personally, they don't put stop loss and they're more than a risk taker than me.

indeed, there are different traders and one will have their own strategy to get their profits. for those who are not using stop loss, they should know what they are doing, because they can easily get liquidated especially if the coin suddenly crashed.
using stop loss wouldn't hurt if you can't keep an eye on all of your trades. it may be your saviour one day.

[iv4n]

This is one of the things that is easier to be said than to actually do it! Especially if you are dealing with new projects on the market!

If you don't wish to have crippling losses simply stick with top coins! I mean we all saw Bitcoin, Ethereum, and some other coins crippled in some moments (with a drop of over 80%) but they managed to recover and break old records! What happened 2-3 times (and more) will happen again! Many projects (I guess the number is pretty high) were scams and pump and dump schemes! You can't hold to those projects and believe in a profitable future!

People who are afraid to stick with Bitcoin even when it's hard should choose gold as pair in trading! Or some other asset that is less volatile than any cryptocurrency! For example, USD/Gold pair... chances to experience crippling loses with this pair is close to zero!

 

[justdimin]

Without a doubt the best way to reduce the chances of a massive loss is with the use of a small position size and a stop loss, however this is something which limits profits and since the main goal of traders is to obtain profits then a great deal of them do not like either of those two concepts, which means that even if they can obtain huge profits if they happen to be using leverage when the market crashes their losses can be monumental to the point thy could even get a margin call simply because they made a mistake when reading the charts while they were not using any method to protect themselves from massive losses.

Diversification is one of them as well. If you know what you are doing then it shouldn't really be a problem but if you have no idea about crypto then you could diversify by buying silly coins and so forth. I highly suggest being very careful with it, you could buy like 10 different coins and if 7 of them fails within first 5 year, then you made absolutely nothing that worths diversification, just buy btc, eth, bnb and be done with it in that case.

However, if you know what you are doing then you should be doing a lot better and you could totally profit from it because you could buy 10 different ones, and even if 1 dropps, the other 9 would save you.

[so98nn]

Looks like you are studying the trading techniques since long. However, to apply your formula one must need to invest minimum thousand bucks so that they can earn decent profits. With the positioning we are already loosing around $100 no matter the stop-loss clocking as mentioned in the OP. Since we have to recover this loss, we need bigger invested amount so that it can happen quicker. In silent market this could work perfectly however in the market like bitcoin (/crypto as whole) this could be dangerous to leverage. The volatility can make higher losses and we might loose the position quickly but with experience this can be recovered too. At the end it's all about practical approach rather than theoretical basis like yours. But very interesting, this is new learning for me.

[Cryptodebjoe]

I think the use of high frequency trading can help also it's important to set benchmark while trading to avoid unnecessary loss...