What is the level of risk? Why is it important? Why does 4C use a fixed risk level of 2% on the Smart Margin? Have you ever wondered? That’s great because that’s exactly what we’re going to answer in this article!
Disclaimer: Our content is intended to be used and must be used for informational purposes only. It is very important to do your own research and analysis before making any investment based on your personal circumstances.
Why use a defined risk per trade?
One of the most important aspects of trading is risk management. No trader is capable of doing only winning trades and that is completely normal.
What matters in the end is to have a winning Risk/Reward (greater than 1) strategy. And above all to manage your trades with good money management.
A trader is not just someone who performs good technical analysis. He is also a very well organized person with a good sense of psychology. By organized, I mean methodical, and conscientious with a well-established strategy.
Which risk to choose?
- Very low risk profile: 0.5% — 1%.
- Average profile: 1%.
- Risky profile: 2% — 3%.
- Very risky profile: >3%.
What does risk correspond to?
This is the maximum amount you allow yourself to lose if your trade hits a stop-loss.
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Let’s move on to a practical example on the PnL risk
Let’s imagine I have a trading account of 10 BTC (again we’re talking about capital only for trading here, I insist, but that’s important).
If I take a 1% risk, it means that at my next trade I can lose a maximum of 1% x 10 = 0.1 BTC.
If for this trade my stop-loss is at 10% and it is reached my loss will always be: 0.1 BTC. I will therefore have 9.9 BTC left on my trading capital.The question you may have is why put a stop loss then? Why not leave the position until the liquidation price?
Because from the stop loss we will be able to determine the size of our position on the trade. So, if my stop-loss is at 10%, how much will be invested in the trade?
The amount invested will follow the following formula :
In our example, the capital invested will therefore be: 1 BTC.
(10 x 1%)/10% = 1 BTC.
In this situation: you trade for 1 Btc of your trading capital. If your Stop-Loss is reached, you lose 0.1 BTC.
Let’s imagine this time that the stop loss is at 5% what will be the capital invested?
Amount invested = (10 x 1%)/5% = 2 BTC.
In this situation: you trade for 2 Btc of your trading capital. If your Stop-Loss is reached, you lose 0.1 BTC.
Now let’s imagine that you trade with a leverage x5 and the same parameters as in example 1:
The amount invested will remain the same as in the first example:
Amount Invested = (Capital x Risk)/Stop = 1 BTC
But this time instead of having 1 BTC of the 10 BTC of your trading capital, it will be 0.2 BTC of your trading capital that will be used.
In this situation: you trade for 1 BTC on the platform which corresponds to 0.2 BTC of your trading capital because you use leverage at x5. If your Stop-Loss at 10% is reached, you lose 0.1 BTC.
What is the point of leverage?
It allows you to bet more than your capital or to maximize the number of simultaneous positions.
At 4C-Trading, thanks to our Smart Margin, the risk and SL are already fixed so the only thing to do is to choose how much you want to allocate to the bots.
Can you trade without developing your own strategy?
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