Want to earn long term profits from crypto trading? For that, you need a trading plan that will guide you through your journey. You can’t merely stay long in the market without having an effective money management system.
First of all, you need to understand the importance of a money management system and how it helps you manage your risk and maximize your returns.
Why is the money management system important?
We all act based on our feelings and emotions if we don’t have clear boundaries or rules. But if you take emotional decisions when trading, you will end up losing your capital. So money management helps you to set clear rules for your trading journey. Next, let’s know how to plan your money management system in five simple steps.
Planning a money management system
Each trader has different trading goals and risk appetite. So it is clear that two traders will have different money management systems and trading plans. Fundamentally, the approach will be the same, but the risk level, time frame, targets, RRR, and stop-loss will be different.
Here are the five steps of building an effective money management system
- Setting Your Risk Level
- Setting Your Trading Goals
- Exit Rules
- Entry Rules
- Performance Analysis and Modification
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Anyway, let us understand each step mentioned above in detail.
Setting your risk level
The first and foremost step of an effective money management system is to set your risk level. How much percentage of your crypto wealth can you afford to lose on a single trade? Decide the risk level and if you reach your risk level on a day, then stop trading and take a break. Come another day or the next day to trade again.
For example, you can choose your risk level from 1% to 5% of your total portfolio. Once you reach that limit, don’t trade for that day. Remember, never break the rules. Otherwise, there is no point in planning a money management system.
Setting your trading goals
The second most important factor to consider is setting your trading goals. Trading goals include two important factors:
- Setting targets
- Set Risk Reward Ratio
For setting realistic trading goals, you need to calculate your risk-reward ratio. The risk-reward ratio means you want to take risks to get some profits higher than the risk. For example, some professional traders never enter trade if they don’t find a trading signal with RRR=1/5. That means you are ready to lose $1 per share to make a profit of $5 per share.
Most of the traders only pay attention to entry rules, but exit rules are more important than entry rules. You need to note the fact that most of the professional traders lose more trades than they win. But with effective money management, they make a net profit.
So you need to decide a stop loss and target before you enter a trade. Entering a trade is easy, but setting the exit rules before entering requires some skills and expertise which come with practice.
You need to choose a strategy and a few sets of signals to decide the entry rules. Consider the factors like volume, indicators, S & R level, RRR before you enter a trade.
Performance analysis and modifications
Last but not least, analyzing your system is also one of the most important factors. Check your money management system, whether it works or not, every week or month. If there is a need for change, then modify.
If you want to become successful in your crypto trading journey, prepare a money management system that works for you. Unless a plan, you will make impulsive trades and lose your wealth. I hope the above information helped you to understand how to build a trading plan. Finally, share your thoughts and ask your queries below.