Risk Management (RM) is a heavy part of trading any asset class. What amount of risk or loss are you willing to take? And how do you limit your losses?
In my years of technical trading, risk can be limited by the entry point, buying close to support and selling upon the break of said support. This works both ways, up and down. Up and down you say? What does that mean? Let's use LTC - litecoin as an example.
Litecoin formed a head and shoulders pattern. Visually you have three high points, with the middle point being prominently higher than the left and right point. Left peak was formed on June 19, middle peak formed on July 4 ( at a price of 55usd), while the right peak made its mark on July 31. The head and shoulders pattern is a reversal pattern of uptrends, meaning this may go down. For more on this pattern you can refer to:
stockcharts.com...school/doku.php?id=chart_s...
Now many will contest that the coin has already moved out of said pattern as shown by that strong bounce on July 31. It bounced from 38 to 44! You might want to buy in but is this the right price? No one can really tell which way the coin will go but you can improve your odds.
There is one more thing I would personally like to see before getting into LTC - and that's the break of that downward arrow. It's a clear resistance line that when broken, will determine my new support zone. Support zone! Aha - now we have our entry point.
At this point in time LTCUSDT is trading at 42.7USD, just below the resistance arrow. Let's say you buy now, if the arrow breaks at 43USD then you aggressively ride this coin all the way to 55USD, making yourself a gain of around 12USD. Great! But what if it goes down? Your support is around 38.50USD, a loss of 4.20USD. Reward to risk is 12USD/4.20USD translating to 2.86 profit per risk. Can you picture a better ratio?
Imagine that you set a buy at the break of the downward arrow. To be conservative you place your buying price at 44.5USD. This is significantly above current price and if things work out well you ride the coin to 55USD. Now you may be thinking that I just lost you 1.8USD of profit!! That's one way to think about it. The flipside is I just reduced your risk. The breakdown of the downward arrow resistance will turn this into support. That's how resistance and support work. When one breaks, it turns into the other. My new support would conservatively by 42.5USD. Thus, recomputing my reward to risk ratio, I stand to gain 10.5USD while I stand to lose 2USD. Reward to risk has now improved to 5.25 profit per risk.
In summary, find those support zones, buy near them, and stick to the plan of when to cut your loss :)
In my years of technical trading, risk can be limited by the entry point, buying close to support and selling upon the break of said support. This works both ways, up and down. Up and down you say? What does that mean? Let's use LTC - litecoin as an example.
Litecoin formed a head and shoulders pattern. Visually you have three high points, with the middle point being prominently higher than the left and right point. Left peak was formed on June 19, middle peak formed on July 4 ( at a price of 55usd), while the right peak made its mark on July 31. The head and shoulders pattern is a reversal pattern of uptrends, meaning this may go down. For more on this pattern you can refer to:
stockcharts.com...school/doku.php?id=chart_s...
Now many will contest that the coin has already moved out of said pattern as shown by that strong bounce on July 31. It bounced from 38 to 44! You might want to buy in but is this the right price? No one can really tell which way the coin will go but you can improve your odds.
There is one more thing I would personally like to see before getting into LTC - and that's the break of that downward arrow. It's a clear resistance line that when broken, will determine my new support zone. Support zone! Aha - now we have our entry point.
At this point in time LTCUSDT is trading at 42.7USD, just below the resistance arrow. Let's say you buy now, if the arrow breaks at 43USD then you aggressively ride this coin all the way to 55USD, making yourself a gain of around 12USD. Great! But what if it goes down? Your support is around 38.50USD, a loss of 4.20USD. Reward to risk is 12USD/4.20USD translating to 2.86 profit per risk. Can you picture a better ratio?
Imagine that you set a buy at the break of the downward arrow. To be conservative you place your buying price at 44.5USD. This is significantly above current price and if things work out well you ride the coin to 55USD. Now you may be thinking that I just lost you 1.8USD of profit!! That's one way to think about it. The flipside is I just reduced your risk. The breakdown of the downward arrow resistance will turn this into support. That's how resistance and support work. When one breaks, it turns into the other. My new support would conservatively by 42.5USD. Thus, recomputing my reward to risk ratio, I stand to gain 10.5USD while I stand to lose 2USD. Reward to risk has now improved to 5.25 profit per risk.
In summary, find those support zones, buy near them, and stick to the plan of when to cut your loss :)