Bernard Baruch, the prominent stockbroker of the last century, believed that a stock speculator needs to be right only three or four times out of ten in order to become wealthy, as long as they are smart enough to cut losses in time. In fact, this means that the success of traders directly depends on their ability to fix losses and close profitable positions at the right moment.
The main mistake that traders make is that they continue to keep unprofitable positions open in the hopes of an early price reversal toward the forecast. Modern types of orders, such as stop loss, trailing stop loss, and attempt zero loss, can significantly reduce the psychological burden on a trader and automatically fix losses at a predetermined level. A level of 10% is considered critical for extraday trade and 3% for intraday, but most traders prefer to place stop loss orders at a distance of 3–5% (extraday) and 1% (intraday) from the entry point.
Above is an example of a trailing stop loss path. This process involves placing a dynamic stop loss order that is kept at a specific percentage distance from the price and is executed automatically when the price reaches a certain level.
Despite the well-known rule that “losses are closed quickly and profits are slow,” most traders do just the opposite. There are two extremes in profit-taking. Some, once they notice the slightest price change toward the forecast, rush to close their positions, while others, in contrast, keep waiting to reach the maximum.
“Only a fool waits for the highest price.”
Wall Street speculator
Deferred take profit orders that help close a position when a certain price level is reached can also be of assistance in profit-taking. A series of indicators help follow the pivot points, one of which — and perhaps one of the most visual and simple ones — is called the Supertrend indicator.
The red line on the indicator indicates a downward trend, whereas the green implies an ascending trend. At the same time, the Supertrend ignores corrections in most cases, thus giving the trader the opportunity not to accept such price behavior over the reversal.
When opening a position, it is important to set a goal. It can be a certain level of resistance or support or a certain circular price level. When the price reaches halfway to the goal, it is worth reaping the profits by partially closing the position.
One important aspect of portfolio risk management is its diversification. It is believed that a trader’s portfolio should contain no more than 20 assets at a time, and the share of each position in the portfolio should not be so large that the fate of the entire portfolio depends on it. In the case of risky instruments, such as new, low-liquid coins that can potentially bring substantial profit, it is worth balancing them with large positions of highly liquid instruments, such as BTC.
Another strategy for taking profits and losses and hedging risks is opening a position on the relevant contract in the opposite direction.
Suppose Alice buys BTC at a price of 5,800 USDT on the spot market. The price hits the resistance level and reaches 6,200 USD, but Alice does not want to sell her BTC at the current price. To hedge her risks, she can open a position in the opposite direction on XBTUSD (BTC contract). Thus, in the event of a possible correction, Alice will be able to compensate her losses with an open position in BTC with the help of a contract.
Trading contracts also implies the possibility of opening positions with leverage. This means that a trader needs significantly less funds compared to an open position on the spot market in order to balance the position. Xena Exchange is currently trading BTC and GRAM contracts with a maximum leverage of x20 and x1, respectively.
The timely fixation of losses and profits is an important component of a well-built risk management strategy. Simple strategies, such as limit stop orders and portfolio diversification, can significantly reduce the risks of your portfolio.