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Identifying Your Trading Risk Profile

Risk management is one of the most important factors of any successful trading plan. Properly managing risk could mean the difference between a total loss, and a survivable one, and allows a trader to take a series of losses and still make it into the black. 

Just like trading styles, there aren’t any concrete rules for risk management. It all depends on your own sense of risk and caution. If you’re confident in your analysis and trading strategy, that can also modify or influence your risk profile.

For example, a more dynamic trader might be willing to risk a large amount of their account balance on daily trades. For traders like that, 10% per daily trade (or 10% per total open positions) may be entirely comfortable, even with the risk that they may lose the day’s trades. However, not everyone has that type of personality, and many traders prefer to take a more cautious approach of risking only 1% to 2% of their account balance per daily trade.

Traders comfortable with risk might also want to open a few positions at the same time, especially if the trades are related, while more cautious investors prefer to stick to a single position at the time, and then adjust as necessary.

Know Thyself

Your own sense of risk, and the risk profile you take for trades, can also help you push forward on a perceived advantage. If you’re a whiz at technical analysis, and you’ve determined the price of a certain coin will grow in some short-term timeframe, that may be a sign to use a trailing stop/stop-loss combo, to both protect your initial investment and lock in your profits, assuming the price moves in the direction you predicted. This also applies to scaling positions as well.

Ultimately, your preferred risk strategy will depend on your own approach to risk, and your level of comfort. Having a good sense of how much risk you’re willing to take is a key component of developing a profitable trading style. Being aggressive and dynamic, or being cautious and conservative, both have their pros and cons, and there is no set rule that favors being one or the other. 

You may also find your risk tolerance increasing as you continue to develop your trading skills and strategies, and you should remember to always adjust your trades accordingly. If one method isn’t working out for you, or isn’t providing the results you expect, then you may want to take a look at your current risk profile and adjust it.