RISK MANAGEMENT
AUTHOR: ELISA CRYPTO
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Risk Management
CO N T E N TS
Risk Management
3 WELCOME
4 RISK:REWARD
5 R CALCULATION
6 POSITION SIZE
7 PREPARATION
8 WIN RATES
9 COMPARING TRADES
10 PORTFOLIO GROWTH
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Risk Management
W E LCO M E
T ma na ge your r i s k s o you ca n g row your portfol i o effecti vely and safely.
h i s g u i d e w i l l p r ov i d e y o u w i t h i n f o r m at i o n y o u n e e d t o k n o w t o
U nd ersta nd i ng r i s k ma na ge m ent i s c r i t i ca l to b e co m i ng a s u cce s s fu l l o ng -
te r m t ra d e r , p ro te c t i n g yo u r c a p i t a l i s t h e s i n g l e m o st i m p o r t a nt t h i n g to
c o n s i d e r , a n d eve r y t ra d e s h o u l d b e m a n a g e d s u c h t h at a m a x i m u m p re -
def ined a mount i s at r i s k for ea c h trad e.
A successful trader takes profits when they are available and cuts their losses
w hen t heir a nalys i s i s i nval i d ate d .
SA u b s c r i b e fo r D i r ec t
n a ly s i s E x p e r t s .
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Risk Management
R I S K : R E WA R D
RISK (R) R E WA R D
T he a mount you a re r i s k i ng on each
t ra d e is refer re d to a s R. I t i s usu al
t o r i s k 1 % o f yo u r c a p i t a l o n a t ra d e .
F o r t h e m o n ey yo u a re r i s k i n g i t i s
important to ensure that any trades
you take are worthwhile. There is little
T h i s d o e s n o t m e a n yo u o n l y b u y 1 % p o i n t r i s k i n g $ 1 0 0 fo r o n l y $ 5 0 b a c k
of the coin, a s ma ny p e opl e t h i nk . It i s shou ld you w i n the trad e, a ratio of 1
the amount you would lose if your stop ri sked to 0.5 potenti al gai n.
los s ord er is h i t .
Many traders focus on their percentage
Example: gains; however, this is irrelevant – what
Your ca pital i s $ 1 0,0 0 0. I f you r i sk 1 % i s i m p o r t a n t i s t h a t yo u r s u c c e s s fu l
p er tra de , t h i s wou ld be $ 1 0 0. trad es achi eve a hi gh reward relative
to w hat you are ri sk i ng.
The refo re R = $ 1 0 0 T h e a b ove ex a m p l e s h ow s i f yo u h i t
yo u r p ro f i t t a rg e t yo u a re rewa rd e d
Ke e p i n g r i s k to 1 % a l l ows yo u to l o s e with only half of what you risked, 0.5R.
more tha n 1 00 t ra d e s b efore you lose
all your ca pital . Le s s d ra mat i cal ly, you Ideally as a new trader, you want to be
c o u l d l o s e 5 c o n s e c u t i ve t ra d e s a n d searchi ng for trad es w hi ch return 2 R
s t i l l q u i c k l y re c ove r yo u r 5 % c a p i t a l or higher. That is, if you risk $100, you
los s. w i n more t ha n $ 2 0 0 for a s u cce s s fu l
trad e, a rati o of 1 :2 mi ni mum.
Obv iously, t he 1 % r i s k ca n b e re d uced
for l ess ex p er i ence d t ra d ers , or if you Thi s i s referred to as the
are on a losing streak. More experienced
traders may be able to assess the R I S K TO R E WA R D
probabil ity of a t ra d e s u cce e d i ng and
c o u l d i n c r e a s e t h e i r r i s k fo r h i g h e r
R AT I O .
probability trades through pyramiding.
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Risk Management
R CA LC U L AT I O N
T o calcu late your trade’s reward, you div ide the distance from your entry to
your prof i t ta rget , by t he d i stance from entry to you r stop l oss:
R = ( P R O F I T TA R G E T - E N T R Y ) / ( E N T R Y – STO P )
Exampl e :
If you r prof it ta rg et i s 4 % above e ntry, a nd your stop l oss i s 2 % b el ow entry,
then 4% ÷ 2% = 2 , o r 2 R .
TRADING VIEW
Luc kily Tra ding Vi ew offers a to ol w hi ch d oes the calcu l ati on for you. You ca n
f i n d t h e t o o l i n t h e d r a w i n g m e n u s o n t h e l e f t , t h e va l u e s i t p rov i d e s a re
illustrate d bel ow for a 3 R t ra d e (the lower number i n the green box).
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Risk Management
POSITION SIZE
T o ens u re you r r i s k rema i ns at t he l evel you have pre - d ef i ne d w hen you r
stop l oss i s h i t , you w i l l ne e d to cal cu late your posi ti on si ze, as fol lows :
P O S I T I O N S I Z E = ( R I S K % X T R A D I N G CA P I TA L ) / STO P LO S S %
Exampl e :
You have a $1 0,0 0 0 p o r t foli o a nd wa nt to ri sk 1 % p e r trade . You sel ect a 3R
t ra d e w i t h a sto p l o s s t hat i s 4 % away f ro m you r e nt r y. You cal c u l ate you r
posi tio n size u si ng t he ab ove fo rmu l a.
Po s i ti o n S i ze = 1 % x $ 1 0,0 0 0 / 4% = $ 2, 500
Therefo re , you w i ll b e i nve st i ng $2 , 50 0 of your $1 0,0 0 0 capi tal on thi s trade.
If your stop loss is hit, you will lose $2500 x 4% = $100 as you originally pla nned.
If you rea c h you r ta rg et you w i ll gai n $3 0 0 (3 R).
If you t ra d e a ga i nst BTC , you ca n su bsti tute the above d oll ar val ues w i t h B TC
values for t he s a me outcome .
Chris, one of our group members, has kindly developed a telegram bot to help
you cal cu l ate p o s i t i on s i ze :
A c c e s s t h e c a l c u l at o r h e r e :
https://t.me/PositionCalcBot
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Risk Management
P R E PA R AT I O N
W h e n you a re p re pa r i n g to ta ke a t ra d e t h e fo l l ow i n g r i s k ma na ge m e nt
items shou l d b e cons i d ere d :
1. W hat is the t ra d e ?
»» What are the entry, stop and take profit levels?
»» Are the stop and take profit levels based on technical analysis?
»» Are you clear about when your trade would be invalidated and you should exit?
2 . W hat is the R: R for t h i s t ra d e ?
»» Is it 2R or better? Never alter the stop or profit levels to manipulate this - the
trade is the trade, and the analysis is the analysis!
»» If you are splitting targets you may have to weight the formula which becomes
more complex. The other option is to consider only the first take profit target
which gives you the minimum R. reward.
3 . W hat is m y p o s i t i on s i ze i f I wa nt to ri sk 1 % of my portfol i o on thi s tra de?
»» Use the position size calculator to help you calculate position size. Again, do not
alter the stop so you can take a larger position.
»» Use leverage as necessary if your capital is not enough to take the trade.
R e m e m b e r i t i s i m p o r t a n t yo u d o n o t m a n i p u l a t e yo u r st o p l o s s
to artificially increase your R, the trade should be based on
tec hnical a nalys i s w i t h you r stop b elow t he releva nt su pport . If t he
R is insuff i c i ent you s i mply sea rch for a not her t ra de.
R e cord how ma n y R you a re making per week/ mont h etc. Not w hat
percentage profit. This is what will grow your portfolio long term,
a nd using t hes e tec hn i qu es makes a su ccessfu l long- term t ra der.
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Risk Management
W I N R AT E S
T he bel ow c ha r t a nd tabl e s how w hat percentage of trad es you need to w in
in ord er to break even ba s e d on vari ous ri sk to reward rati os.
Break Even
Win Rate Risk:Reward
70.0% Win Rate
60.0%
0.5 66.7%
1 50.0%
50.0%
2 33.3%
40.0% 3 25.0%
4 20.0%
30.0%
5 16.7%
20.0% 6 14.3%
10.0%
7 12.5%
8 11.1%
0.0%
0 2 4 6 8 10 12 14 16
9 10.0%
Risk:Reward Ratio 10 9.1%
15 6.3%
Exampl es:
Fo r 0.5 R t rad es – you r i sk $1 00 to gai n $50 – you must w in two -third s to break eve n .
Fo r 1 R t rades – you r i sk $1 00 to gai n $10 0 – you must w in half to break even.
Fo r 2R t rades – you r i sk $1 00 to gai n $200 – you must w in one -third to break even .
Fo r 4 R t rad es – you r i sk $1 00 to gai n $40 0 – you must w in only 20 % to break even.
Fo r 1 0 R t rades – you r i sk $1 00 to gai n $1000 – you must w in only 9% to break even.
I f you to o k 1 0 t ra d e s at o n ly 0. 5 R you wou l d n e e d to w i n 7 o r m o re to ma ke a n y
prof i t. 7 trades wou l d make $5 0 ea ch, a nd 3 t ra d e s wou l d l o s e $ 1 0 0 ea ch, leav ing
you w ith $ 5 0 prof i t .
I n co nt ra st , i f you to o k 1 0 t ra d e s at 4 R , you o n ly n e e d to w i n 3 o r m o re to ma ke
prof i t. 3 trades wou l d make $4 00 ea ch, a nd 7 t ra d e s wou l d l o s e $ 1 0 0 ea ch, leav i ng
you w i th $500 prof it.
(Not compound ed for si mplic ity.)
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Risk Management
CO M PA R I N G T R A D E S
U sing R we can effectively compare trades to each other because the risk is the same
for ea c h. By now you s hou l d und ersta nd w hy you a re not a i mi ng for t he hi ghe st
percentage gai n for a tra d e bu t the hi g he st R . B el ow we compa re t hre e t ra de s w i t h
5% , 4 % and 9% ga ins to ea c h other :
»» The first trade example shows an entry close to support with a tight stop immediately below
support – the point where the trade is invalidated. A strong 5R trade with a 5.2% target.
»» The second example shows a late entry, the stop is in the same place as the first trade therefore the
return is reduced to only 2R.
»» The third example shows the same entry as the first trade also with the same 5R reward. The stop
is deeper and the profit target is higher. Clearly, the higher profit target has a greater risk of not
being achieved than the first trade, therefore this is a lower probability trade although it has the
same reward.
Do you understand why the first trade is the best trade?
The comparison shows the importance to your portfolio of entering as close to support
as you can, allow ing a tight stop, a s wel l a s s how i ng t here i s no real ne e d to ai m for
massive percenta ge ga ins if your tra d e s a re s etup effe ct i vely.
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Risk Management
P O RT FO L I O G R OW T H
Conser vat ively, l et’s s ay you take a trad e every couple of d ays and you exit at
t he f i rst ta rget w i t h a n avera ge 3 R, and your average w i n rate i s 60 %.
For 3 0 days a mont h t here w i l l b e 1 5 trad es taken.
60 % won → 9 t ra d e s → 3 R p er t ra d e = 27R
4 0% l ost → 6 t ra d e s → - 1R p er t rad e = -6R
Total = 2 1 R in t he mont h .
I f you r isk 1 % of your p or t fol i o p er trad e, i .e.
- 1R = - 1 % of p or t fol i o
+ 3 R = + 3 % of p or t fol i o
Then your por t fol i o i s up 2 1% i n t he month.
LEVERAGE
If you select trades with tight stop losses you will be limited in the number you can afford to take
with your capital. For example, if your risk 1% per trade, and take a trade with a stop loss of 1%, you
will use 100% of your capital to take the position. This is when you can use leverage to allow you to
artificially increase your capital, taking more trades while maintaining the same risk per trade.
Increasing the leverage of your trade does NOT change your risk* or your profit, changing your
position size, or the number of contracts does.
No other trader can tell you what leverage to use, since this is a function of your personal portfolio
size, risk appetite and the trades you are taking.
Example:
You long 10,000 contracts at 1x leverage. Your margin - the cost to hold your position - is 1.2XBT. If
price rises by 1% you will gain 10,000 x 1% = $100.
You long 10,000 contracts at 10x leverage. Your margin - the cost to hold your position - is 0.12XBT.
If price rises by 1% you will gain 10,000 x 1% = $100.
*presuming your stop loss remains closer to current price than your liquidation price.
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Risk Management
This material is for informational and educational purposes and its
accuracy cannot be guaranteed. We do not accept any responsibility or
liability for the use or misuse of this information, nor for any errors or
omissions.
Any action you take based on this information is at your own risk; it is not
designed to meet your personal situation – we are not financial advisors
nor do we give personalised advice. Decisions should be made only after
consulting with your financial advisor and no be based solely on what you
read here.
JA o i n T e a m TA f o r D i r e c t
n a ly s i s E x p e r t s .
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