If you cannot answer these questions then it is not a good idea to click the “buy” button! Unless you just want to gamble and throw money away.
Question 1 - What is my total account size?
Probably the easiest question for you to answer.
Account size is the amount of money that you have in the market.
Personally, I like to split my total account size into two parts. One part for longer term HODLing. One part for short-mid term swing trading.
For my calculations, I forget about the HODL account and only look at the money in the trading account.
I personally do not day trade. If I get into a position, I expect to be in it for 1-4 weeks. Obviously, this rule is flexible based on market conditions.
Question 2 - What am I willing to lose per trade?
This one is a bit more subjective because it comes down to how risk averse you are.
It is generally accepted that you should risk between 1-5% of your account per trade.
For me, anything above 3% is higher than I like, so I stick to 1-2% and sometimes 3.
So, if you have a trading account of $10,000 and you want to risk 1%, you are risking $100:
$10,000 x . 01 = $100
To be clear – Risking 1% of your account does NOT mean using 1% of your account each trade. You are not spending $100 on each trade. Risk =/= position size.
Risking 1% means that if your Stop Loss gets hit you lose $100.
Question 3 - What is my Stop Loss?
Firstly, what is a Stop Loss?
A Stop Loss is an order that is placed to automatically close you out of a position should the price be hit.
You should place your Stop Loss order right after you open your position.
This is also a good time to place another order to close out your position at your target price.
But where do you put the Stop Loss?
A Stop Loss is best placed at a price that invalidates the reason you got into the trade in the first place. Sometimes this is, very creatively, called the “Invalidation Level”.
For example, if you are trading a breakout to the upside, and then the price of your crypto shoots down in the other direction past your support levels, it is no longer a breakout and you should exit the position.
To restate this in a different way, this level should not be arbitrary. There is no reason to automatically put your Stop Loss at 6.7138%, or any other random number, of your entry.
The level you chose should be based on Technical Indicators; like a base of support, a Fibonacci level, or a previous high.
This is because the market does not care about your arbitrary values. The market is made up of people and whales (who, believe it or not, are also people), and they, the ‘Market’, care about TA.
Here is another example of a more short term trade to the downside. You could be more aggressive with the Price Target considering the resistance was so weak, but this is just an example to illustrate my point.