UNDERSTANDING AND MASTERING RISK MANAGEMENT STRATEGY.

As a newbie, using the 1% rule is very important, because when I started

trading personally I started with a very small portfolio size and I didn’t take
profit even when I saw a 200% increase on my profit card because I had this
1,000% mentality and it cost me dearly. But as time goes on I developed a
plan to lock 30% of my profit or set BE (break even) depending on the type
of position I’m in.

So to master risk management you have to understand four things, these

are;

1. How to get your stop loss % and utilizing your stop loss percentage from
entry price.

2. Position size and how to calculate your position size.

3. How to determine and calculate your leverage using your SL % to avoid

liquidation.

And lastly.

4. Risk to Reward Ratio (RRR).

So let’s dive in extensively into all that there is to understand about risk
management.

1. How to get your stop loss percentage and utilize your stop loss
percentage from entry price:

So this section is just about basic mathematics and to get your stop loss
percentage from your entry price, you need the formula below.

Stop loss price – Entry price ÷ Entry price × 100

Now, let’s take an example. You’ve analyzed a trade on the AVAX/USDT

contract and you came to a bias to long from the entry price of $37, SL of
$35.12 and with a take profit of $43. Let’s calculate the SL % from the above
values.

So therefore; SL: 35.12, entry: 37 and TP: 43 (note that TP value is not
needed for this calculation).

Using our formula; Stop loss price – Entry price ÷ Entry price × 100

We’ll have it as: 35.12 – 37 /37 × 100= 5.1% ( it doesn’t matter if it’s
negative or positive)

So we have our SL’s % from entry to be 5.1%, now we can proceed with
position sizing. ( Note this formula works for long and short position trades
too).

Note:

This formula above is the basic formula you need when getting stop loss
percentage especially when following the signals of other traders.

2. Position size and how to calculate your position size;

Now for position size and how to calculate it you will have to determine your
capital and determine how much you’re willing to lose in each given trade.
Okay, let’s say I’m a beginner trader and I go with the 1% rule and I have a
capital of $200 so risking 1% of $200 will be $2.

Taking all this information above and given that we were to take the
hypothetical trade on the AVAX USDT contract and you’ve calculated your
stop loss to entry price %. Remember that for that trade, we got 5.1% and
that’s what we’ll be working with (5.1%).

So now we calculate our position size. With the given 5%, we will use the
similar formula we used for calculating % change but this time around we
divide our risk amount here which is $2 (1% of our portfolio size of $200) by
the SL % which is 5.1% and we’ll multiply the total value by 100. Let me
explain…

So remember the original formula is to find SL% change to entry is given as

👇

Stop loss price – Entry price ÷ Entry price × 100

Instead the formula for calculating position size will be in two stages the first
will be.

Position size= risk amount ÷ % change from SL to entry × 100.

Now let’s input our values and calculate

Given values; risk amount = $2 and % change from SL to entry = 5.1%

Position size = 2 ÷ 5.1 × (100) = 39.22.

39.22 is the value you’ll input into your “order value”.

Now let’s get to the 3rd part.

3. How to determine and calculate your leverage using your SL % to

avoid liquidation; First of all what is leverage in trading?

Leverage in trading is like using borrowed money to increase your potential

profits or losses. It’s like having a magnifying glass that can make small
movements in the market look bigger. While it can amplify gains, it also
increases the risk because if the market moves against you, your losses can
be larger than your initial investment.

For each trade, leverage, margin and position size all have a direct
relationship.

Please take note that this is for isolated margin leverage only as a beginner
trader you should only trade on the isolated margin leverage and that’s why I
am focused on elaborating it here. I believe anyone using cross margin
understands risk management totally, that’s why they can go with the
extreme leverage possible.

I’ll use a practical example from what I have said from number 1 and 2 to
explain this part.
Remember our AVAX USDT trade where we analyzed calculated our SL % to
entry and got 5.1%? We are going to use that to find the best leverage while
avoiding liquidation. The direct relationship between leverage and % change
from SL to entry is multiplication. So given our AVAX USDT trade with a SL of
-5.1%, if we go with a leverage of 10x and our SL is hit, you’ll see a loss % of
-51% on the profit card and if you choose to go with a leverage of 7x that will
be a % loss of -35.7%. With this example you can apply it to any trade
possible provided you’ve gotten the SL % to entry.

Now for the big question. How to get the best leverage without getting
liquidated?

According to Bybit, liquidation is triggered when the account rate hits 100%
for isolated margin, while for cross margin, liquidation is triggered when your
margin balance hits 0.00.

So if given that AVAX USDT trade with the SL % of 5.1% and you went with a
leverage above 19x, you’ll be liquidated before that trade hits your SL and
let’s say you go with a leverage of 20x you’re at the risk of being liquidated
because 20 × -5.1% = -102% and remember that liquidation on isolated
margin leverage is triggered when loss rate hits the negative value of 100.
So what I advice is that when calculating your risk management and entering
a trade make sure you take note of the liquidation price on the check-out
option before you enter a trade because sometimes our calculations might
be right but you’ll still end up being liquidated. Personally, I don’t let my %
loss when trading on isolated margin to exceed -70%, that’s enough to avoid
liquidation and don’t forget to check out the liquidation price before hitting
that long buy or sell short button.

And also note that the higher the leverage the lower you margin size. Let’s
say you are to take a trade and you chose to go with 2x leverage and to
sponsor that trade you’ll use $5 of your portfolio, if you increase your
leverage to 10 times (20x) your margin size will reduce by 10 times as well
($0.5). If you don’t understand this part don’t worry as you trade more often
you’ll get a hang of it.

4. Risk to Reward Ratio (RRR).

So far so good, this is the last aspect of my risk management strategy. Okay
let’s start this way, when trades are analyzed on trading view for example
and you project the long or short position to you will see your risk to reward
ratio on the long/short projection tool. With the risk to reward ratio(RRR) you
can calculate how much you are potentially going to win in a trade.

Let’s use our AVAX USDT trade to explain this, remember we risked $2 in
that trade let’s say the trade is a 3 ratio trade that means if our trade hit TP
we’ll have a profit of $6 being 3×2, risking $2 again on a 7 RRR trade and
the trade hits our TP then we have made a profit of $14! ($2×7).

Well to round this up, the whole purpose of this material is to help you
understand the relationships between leverage, position sizing and most
importantly to avoid liquidation.

I must say, Bybit as an exchange has a very intuitive UI that makes position
sizing easy for even novices.

That’s all I have for you on risk management.

Thanks for reading through and if you don’t understand go through over and
over again because it took me 2 weeks to totally understand everything on
my risk management strategy.

Invaluable™.