Risk management is VERY important, especially in crypto. If you don't know how to manage your money you will likely lose a whole lot. Take ripple for example from 4/24 - 5/09. We can see it trading in a sideways channel. Channel simply refers to the area in which the price is contained. It has this sideways rectangular shape. If you don't understand support and resistance levels then read my last post linked below.
So first establish your support and resistance levels.
Next step, buy at your support zone.
Next, sell at your resistance zone.
But how do we protect our money if the price breaks support?
We use a stop loss to automatically sell our coins if it reaches a certain level. Unlike a limit order which can only be set above the price, a stop loss can be set below the current price. We use this in case the trade moves against our favor. Typically I will set my stop loss slightly below our most current support level. Why? If the price ends up falling more than anticipated we hope that it will find support before it hits our stop loss.
Since we can see the potential profit if we were to buy at support and sell at resistance we can ensure that we have a good risk to reward ratio. We need to have a minimum of a 1:1 ratio but ideally we want a 2:1 ratio or more. What these means is we have the chance to make twice as much as we could possibly lose.
So imagine a situation where for every time you are correct you will win $20. Every time you are wrong you lose $10. So you win double what you lose.That's a 2:1 ratio. Lets say out of 10 times you are correct 5 times so 50% of the time. 5 times $20 is $100. So now you have $100. However you lost 5 times, so you lose a total of $50. So your net profit is $50 ($100-$50). Even though you were only right 50% of the time you are still profitable. The higher your risk to reward ratio, the less amount of times you have to be correct. What you should strive for is at least a 2:1 ratio. If your ratio is less than that then considering sitting on the sidelines.
In our XRP situation you can see we have the chance to win 6% if we are correct and a possibility of losing 3%. This is a 2:1 ratio. This is how you should approach channels as well as support and resistance levels. If there's a good ratio and based on your analyse you think it will bounce at support then take the chance and sell at resistance.
So first establish your support and resistance levels.
Next step, buy at your support zone.
Next, sell at your resistance zone.
But how do we protect our money if the price breaks support?
We use a stop loss to automatically sell our coins if it reaches a certain level. Unlike a limit order which can only be set above the price, a stop loss can be set below the current price. We use this in case the trade moves against our favor. Typically I will set my stop loss slightly below our most current support level. Why? If the price ends up falling more than anticipated we hope that it will find support before it hits our stop loss.
Since we can see the potential profit if we were to buy at support and sell at resistance we can ensure that we have a good risk to reward ratio. We need to have a minimum of a 1:1 ratio but ideally we want a 2:1 ratio or more. What these means is we have the chance to make twice as much as we could possibly lose.
So imagine a situation where for every time you are correct you will win $20. Every time you are wrong you lose $10. So you win double what you lose.That's a 2:1 ratio. Lets say out of 10 times you are correct 5 times so 50% of the time. 5 times $20 is $100. So now you have $100. However you lost 5 times, so you lose a total of $50. So your net profit is $50 ($100-$50). Even though you were only right 50% of the time you are still profitable. The higher your risk to reward ratio, the less amount of times you have to be correct. What you should strive for is at least a 2:1 ratio. If your ratio is less than that then considering sitting on the sidelines.
In our XRP situation you can see we have the chance to win 6% if we are correct and a possibility of losing 3%. This is a 2:1 ratio. This is how you should approach channels as well as support and resistance levels. If there's a good ratio and based on your analyse you think it will bounce at support then take the chance and sell at resistance.
