This article is Part 5, Scaling-in & out of Trades of our Trading Academy series on Risk Management in Crypto Trading.
See below the risk management framework developed by us, which we will use use as guide to walk you through the different aspects of risk management in crypto trading:
hoc-trade Risk Management Framework
In this fifth chapter, and before looking at some crypto trading specific risk management aspects in the next chapter, let’s have a look at risk management strategies during a specific trading approach, scaling in and out of trades. One more advanced trading strategy, but one used by many big and successful traders, is to build bigger position sizes without increasing their risk per trade, thereby growing their potential gains in a trade, while limiting it to the same amount of risk. This strategy very well fits one of the most important trading principles very well, cut your losses early while letting your profits run…
…or as Warren buffet already said, “when it’s raining gold, reach for a bucket, not a thimble”.
What is meant by this? If you catch a winning trade, make sure to win big with this trade. Actually, many traders do exactly the opposite, they cut their winning trades early in the fear of losing their profit again, while they add even more to their loss trades as they cannot accept the loss and move on. This is one of the major problems of traders, but this will goes beyond risk management and will be part of other articles to follow.
For risk management, I want to talk about the strategy of adding to your profit trade, while downsizing your loss trade. On the profit side, you can have trigger points as to when add more positions to your already profitable trade, thereby winning big if it becomes a strong profit trade. In risk management, many traders work with breakeven, so a zero payoff for your trade.
Scaling-in to profit trades graphic
Let’s say you bought 1000 USD worth of Bitcoin with your Stop Loss at 1%, or 10 USD risk. If Bitcoin is running long now from 30.000 USD per coin to 30.300, you are 1% in profit. To grow that position, you can add another 1000 USD Bitcoin position with a new SL for both trades at 30.150 USD. If the price decreases after that to 30.150 USD, you made 5 USD on your first trade, while you lost 5 USD on your second trade, so overall breakeven.
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You are NOT adding additional risk to you trade!
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However, if it continues to go long, so as Warren Buffet would say it’s raining gold, at 30.600 USD, so 1% further increase, you are now at a profit of 30 USD, not 20 USD in case you would have had only 1 position. You can now add another position to it and set your combined SL at 30.300 for breakeven. As you can imagine, you can build that position bigger and you can also vary to position sizes of the trades you add, whether you want to give the some more or less room for the price to fluctuate so you aren’t stopped out too easily.
Scaling-out of loss trades graphics
The same concept also applies to trades that go into loss! If you are scaling out of loss positions, you can actually trade bigger position sizes from the beginning, as you will reduce the position in case the trade doesn’t work out your way. You can think of this concept with these reverse pyramids as shown in the graphics, representing your position sizes depending on how the trade goes.
Scaling-in and scaling-out is actually one of the most powerful strategies in trading, you are acting in accordance with the most important trading principles and do pretty much the opposite than most of the traders out there (the majority of traders loses money in trading!). Risk management is at the core of this strategy, and you can use it in your favor. This was a bit more advanced theory about risk management now, if you are interested in more of those, let us know down in the comments.
We will release our Risk Management series step-by-step! The next article will be on Crypto-specific Risk Managemenet aspects. If you are interested, please give us a follow and get notified as soon as the next article is uploaded.
If you would like to leverage AI for Risk Management in Trading, please also see our recent article on this here.
Thank you for reading and stay tuned for the next update!
Please note that none of the above should be considered financial advice! Please always do your own research!
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