Money management (MM) is managing finances in such a way as to consistently multiply them and completely eliminate the possibility of losing the deposit or experiencing significant losses. In English, it translates exactly as it sounds – managing money.
This topic is deeply explored by theorists, and perhaps my material might not seem interesting to a theorist-writer or critic. But we are PRACTITIONERS, and our sole goal is the stable multiplication of funds in the stock market in the long-term perspective. Therefore, in my material, I will only consider the practical approach and describe it in simple words that everyone can understand.
This topic seems very simple when you read or listen to it – 99% of the audience agrees with it. But when it comes to action, one notices (if they are observant) that it is not so easy to adhere to the rules of money management. Trading or investing, you face the two strongest emotions – fear and greed, when it comes to money. I’ve noticed that the fear of losing money or the greed to earn it has the strongest emotional impact on most people.
Therefore, the profession of a trader is one of the most challenging, if not the most challenging. Here, you are left alone with fear/greed every time you are about to make a deal. The main difficulty in trading is emotions, not the entry points into deals, and this conclusion is the result of a survey among 350 traders.
If you are reading this article, it means you want to become a trader, and I know that no arguments about how difficult it can be will stop you because the emotion of “greed” will overcome this stop. You want to make money and make money consistently in this business, hence you are here. Therefore, understand and APPLY what I want to say and, most importantly, apply it in practice! We are here for the long game and are building a long-term business, if you are here for a quick profit, then you better go to a casino, where at least you will get different emotions besides disappointment.
Do Not Buy With Your Entire Deposit In trading.
Let’s end the lyrical part… I wrote earlier about “managing money in such a way as to consistently multiply them and completely remove the possibility of losing the deposit or experiencing significant losses,” and for this, there is a first step – do not overestimate the risk on a single deal. This means that by opening one deal, you risk a maximum of 1-5% of your trading deposit. Step zero here is not to keep all your money on one exchange or wallet. For example, I trade on two exchanges, keep money in two wallets, use two exchangers.. And in case the BYBIT exchange says that I will never see my money again (I am prepared for this), I know that I have money on Binance. I also separately store USDT (USD equivalent, only in the cryptocurrency market) in case I need it for purchases when the market crashes. I always keep USDT and most likely will always keep it.
The first principle of money management is “do not put all your eggs in one basket.” Opening a deal with your entire deposit means that you have put all your eggs in one basket, which might lose its bottom. Putting eggs in two baskets also does not insure you. Use 20 baskets. The idea is clear? You can start making notes for yourself.
Therefore, the main rule is to open no more than 1-5% of the deposit on a single deal. I know that some of you will think of opening 20 positions simultaneously on a rise and each for 5% of the deposit and think that you are adhering to MM. NO! It’s the same as opening a deal for the entire deposit. If you open 3 deals on a rise, you must also distribute them among themselves so that 1-5% of the deposit is involved.
About Risk Control Cryptocurrency exchanges (and not only) provide a tool for increasing risks – leverage. Leverage is an exchange tool that allows you to increase potential profit and, accordingly, losses by borrowing money from the exchange against the collateral of the amount in your balance. I believe the term “leverage” comes from “lever,” which in everyday life gives an advantage to its user.
You may have only 1 BTC, but open a deal and earn a profit as if you had 10, 20, or 100 depending on your choice (leverage can be from 2x to 125x in the cryptocurrency market). Essentially, you can increase your profit many times over, but proportionally, you increase potential losses.
Technical Details.
A 10x leverage gives a 10% profit to the deal with a 1% movement of the asset. But you lose 10% with a 1% move in the opposite direction. The main difference from simple trading (where, for example, you bought an asset for 100 conditional units and you can sell it even for 10 conditional units and lose 90%) is that trading with leverage implies LIQUIDATION, which is predetermined and you will see it when opening a deal or can calculate it in advance.
Conclusion – do not raise the leverage above 10x-15x and always set a stop-loss (loss limiter, more on this below). When you open a deal – secure it with no more than 1-5% of the deposit, and then you will not lose your money. And do not open several deals on a rise for different assets simultaneously, and if you do, the sum of deals should not exceed the standard risk. It’s easier to lose than to recover. Do not increase risks.
How to Use Stop-Loss? Stop-loss is an order (deal request) on the exchange that will limit your losses from significant losses, but using a stop-loss, you still incur a loss, albeit smaller than liquidation of the position or fixation after a strong move against you. In English, it translates as “stop loss.”
Example, you buy an asset for 100 conditional units and plan to sell it at 130 u.e, but the price moves against you, and the next day this asset is worth 70 u.e, and you are at a 30% loss. You can set a stop-loss at a price of 90 u.e, then the exchange will automatically fix a 10% loss on the deal, even if you are not on the exchange. The advantage is obvious – a smaller loss and the opportunity to enter a new deal, rather than sitting with frozen money.
There is also a downside, the price may reach 90 u.e and return back and even go up, but from my observations, in 80% of cases, the price will fall further after reaching the stop-loss and save you from a loss.
There’s one BUT, theoretically, you can incur 20 or 30 stop-losses in a row and have losses. Stop-loss needs to be correctly placed, but the most important thing here is the correct entry point. With the correct entry point, your stop-loss will be in a favorable zone for you, it should be placed close, and the potential profit far, but if you enter deals incorrectly, you will face constant triggering of stops, so the choice of entry point is most important. How to enter deals is another topic. I will partially touch on this topic later.
Conclusion – always insure your deals with a stop-loss.
Stop-Loss at Breakeven.
As soon as the price moves in your direction, you should move the stop-loss to breakeven (hereafter BE). I usually do this after a 1-2% movement of the price in my direction, and I know that from this moment on, I will remain at my own, no matter what happens.
The moment of moving the stop-loss to BE (when you automatically exit the deal at the point where you entered it, in case of a move against you) is something that comes with experience. Watch the price movement and choose the moment to move the stop to BE! Always do it at the first opportunity, and even if you are knocked out of the deal, you can always enter at a more favorable price. And with this approach, you will significantly reduce your losses. There’s a downside – you might be knocked out, and the price sharply returns back, but based on statistics, this happens less often than you use this “function” limiting your losses.
Conclusion – always move the stop-loss to BE as soon as the market provides the opportunity.
What is the Profit-to-Risk Ratio? Continuing the topic of stop-loss, you should see the level of potential profit fixation and loss in advance, and it should be at least 2 to 1, and preferably higher. This means, for example, you will earn a profit of $500, and the loss will only be $250 (at a profit-to-risk ratio of 2 to 1) or $166 (at a profit-to-risk ratio of 3 to 1). You can afford two losing deals and one profitable one and remain at your own, and if you have 5 losing deals out of 10, you will still be earning. Such is the magic!
You cannot invent profits and risks for yourself; you must rely on a strategy for finding entry points, and your profit must be realistically achievable, not fabricated. That is, the price must have real potential for movement! This is directly related to entry points, and you need to know when to buy and when to sell. This is a whole science that you can learn from me.
If we go strictly by the definition, it seems that high profit/risk ratios, such as 10 or 5, are more preferable. But this is not always the case. During trading, you must also take into account.
Minimum Characteristics of a Good Strategy – 50% profitable trades with a profit/risk ratio of 2 to 1. Then, the probability of blowing up the deposit will tend toward zero, of course, provided that all money management rules are followed.
RULE № 4 Stick to the profit/risk ratio with a value from 2 to 1. Such an approach will allow you to make 50% profitable trades and earn steadily.
What is the Goal in Trading? For many, a logical goal of trading is earning/income, and that is natural. When you first focus on this, you look at potential profit and strive for it, and that is also correct. But I noticed that it works like skipping a step.
The main goal, especially in the beginning, should be – not to lose. First and foremost, I look at how not to lose on a deal and how to reduce the loss to zero. And primarily, I base my actions on losses, not profits. As soon as you start doing the same and begin to cut your losses, you will magically find that you have started to earn. One comes from the other.
Remember, emotionally and technically, it’s difficult to recover losses, and falling into the red generates more fear and more greed, which is a trap. I will talk more about fear and greed later. Back to losses! Plan your trading so that you do not lose and LOOK primarily at potential losses, and we’re back to entry points! You need to know when and where to enter deals expecting a rise/fall. While you are recovering a loss, another trader is already in the green and taking profit.
Losing 50% of your deposit (very easy), you will have to make 100% profit to get back to even. Losing 75% of your deposit, you will need to make 400% profit! Take my word for it – it’s a challenging task. Therefore, plan your actions in advance to avoid losses and keep them in mind primarily.
Conclusion – focus on how to lose less, and you will magically start to earn more. Use a Strategy Having a Strategy means that you know when to enter a trade, when to exit, and where to fix a loss if necessary. A good strategy is when you earn in the long distance. Technically, we will not discuss Strategy (when to buy/sell) here. Here, let’s discuss its importance in combination with MM.
Remember, 100% profitable trades are impossible, no matter what some scammers’ marketing tells you. Do not believe in 100% profitable trades! Every trading strategy has room for losses, and you need to understand this and prioritize minimizing these losses (discussed above). You will achieve minimization if you “wait out” your deal. Being in a deal all the time is a big mistake by beginners who want to catch every movement. Perhaps from any point, one can predict movement, but personally, I cannot. I do not know every minute where the price will go, and I will not know! But I know the moments to enter deals according to my strategy! And correctly choosing the entry point, I earn by it.
Compare yourself with a hunter or a fisherman! A fisherman pulls the rod only when it shows signs that there is fish on the hook. Yes, sometimes there is a false signal, but rarely. The fisherman does not pull the rod out of the water every 3 minutes hoping to see fish there! The fisherman chooses a good body of water, waits for the moment, sits quietly, and “feeds” the fish.
Conclusion – strategy is an important part of trading and, together with money management, forms profitable trading in the long term. About the Most Destructive Emotions As I said, fear and greed are the strongest emotions for a person, leading to incorrect actions. Therefore, many sell at the very bottom of the market and buy at the peak.
I conducted a survey at the beginning of 2019 when the market was red for almost a year and then fell another 50% from the bottom. And the survey result – 3% of newcomers to the market, who came in the last 2 months. Who needs to buy Bitcoin at $3500, because it’s a cheap asset that is falling. Unfortunately, I did not conduct such a survey when, two months after that, it rose by 350%, but I did conduct a survey at the end of 2019 at a price of $10,000 and found out that at that moment there were 20% of newcomers! And then Bitcoin was worth a minimum of again $3600 (March 12, 2020). And there, many sold out of fear that it would be worth $500-1000-2000. But alas, a month later, it grew by 100%, and those who sold at the bottom are buying it out of greed to miss the profit. And so on in a circle, financial markets operate exclusively on these emotions and will always operate, taking money from the crowd prone to emotions.
It is inherent in humans to buy high in hopes of further growth and sell low out of fear of even greater losses. Therefore, always buy cheap (below $6000 for Bitcoin, speaking of actual investment decisions at the time of writing this material) and sell high, not the other way around.
These same emotions are used by scammers and have been used at all times, so there is a saying “a sucker is not a mammoth.” Any person will always be greedy for money! I’ve seen people send their last money to scammers hoping to earn, and I can guess that at the moment of sending, they were already thinking about how they would spend the future profit, and perhaps even spending it, getting into debt in the hope of paying it off with profit. The same emotions again.
How to understand that greed is guiding you in trading?
Track the moment when you open a deal, what do you do? If you ONLY count the profit and how much you will earn if the price goes up, especially when you think what will happen if the price goes very high with you. You are already counting the profit and not paying any attention to potential losses. CONGRATULATIONS! Greed has overtaken you, and you are making the wrong decision! Recognize yourself?? Therefore, first, you count the potential loss and see if you need it or not. Then you count the real potential profit and do not build hopes on super goals. And do everything based on your strategy. I also recommend you to listen to emotions and do the opposite! If the price is at the lows (below $6000 for Bitcoin) and you think to sell everything and buy lower – then better buy more right now despite being SCARED. Likely you will earn in the coming months. As soon as the price is at the highs (above $10,000 for Bitcoin) and you feel that if you do not buy now then you will make the biggest mistake and will not be able to realize your dreams with this money – do not buy, but wait for the market to fall.
Conclusion – the strongest emotions for a person, fear and greed, guide you. Trading is the most deceptive profession from this point of view. How do I know? I’m also human, and I experience emotions, but I have learned to control them! Addendum. Fear and greed have one essence at the root – the sense of loss. Probably the sense of loss is one of the strongest emotions for a person. Fear – to lose money, greed – to lose missed profit. And as hopeless as it sounds – we have a solution, which sounds like DISCIPLINE.