🥸Risk Management Strategy

These are some risk management practices used by MetaverseSherpa and do not necessarily reflect the risk management practices of everyone at Market Masters.

Alerts provided by Market Masters tend to provide the potential to make 15-25% per trade at 1x leverage (spot). Trading with leverage (e.g. 5-10x) will maximize your returns, but comes with some risk. This article attempts to provide some ways you can minimize risk.

Risk management is key to capital preservation. There is no strategy that is going to win 100% of the time. On average, most of the best strategies have a 60-70% success rate. If we know we're likely to lose 30-40% of our trades, we should plan to minimize those losses by implementing a solid risk management strategy.

Below is my risk management strategy:

1) Only trade with 5-10% of account balance on each trade. For example, assuming your account balance is $1000, only use $50-100 for your margin. This allows you to open 10-20 trades and have funds left in case you need to DCA.

2) Only risk 1% of your account balance per trade. This means that you would need to lose 100 trades to blow your account. If your account balance is $1,000, then your risk amount becomes $10. You are only risking $10 per trade. This will be used later to determine your leverage.

3) Determine your SL price and TP price and draw your trade on your chart in TradingView.

3a. When trading a long, your Stop Loss (SL) price should be the most recent swing low on the time frame you're creating your trade on. If you're trading a short, your SL price should be the most recent swing high.

3b. To determine your Take Profit (TP), you might use TPs provided from a signal or you might use Elliott Wave/Fib targets or by drawing trend lines to determine what your TP might be. You might also use Resistance or Support zones.

3c. Once you know your TP and SL prices, you can draw your trade on your chart in TradingView (TV). TV makes this very easy to do. Once you enter your TP and SL price, you'll be shown your Risk/Reward ratio. We should never take a trade unless our R:R is greater than 1:2 or 2.0 -- meaning that the price difference between the entry and TP price is at least double the difference between the entry and SL price.

The following video shows how to draw your trade in TradingView. This can also be easily done on mobile devices.

3) Once you've drawn your trade on the chart, you can see the SL %. If you know the SL %, you can determine how much leverage you want to use in order to not exceed 1% of your account balance.

To better understand how to calculate the Stop Loss Percentage, refer to the following formula:

Stop Loss % = (Entry Price - Stop Loss Price) / Entry Price * 100

4) Before deciding what leverage to use, we must determine our position size. If the amount we're willing to risk is $10 (1% of $1,000 account balance) and our SL % is 5%, then our position size will be:

Position Size = Risk Amount / Stop Loss %

Position Size = $10 / .05 = $200

Leverage Amount = Position Size / Margin

In our example: Leverage Amount = $200 / $50 = 4x

Now we know our margin size (e.g. $50) and our leverage (e.g. 4x) that ensures we use 5% of our account balance for the trade and only risk 1% of our account balance.

In summary, there are many different risk management strategies and this is the one I practice in order to preserve capital. Interested to hear your thoughts, comments/feedback. What's your strategy?

Confused about leverage? Read this next article on why leverage doesn't matter...

Ready to test your knowledge? Take our Risk Management Quiz!