Constructing a Crypto Trading Portfolio
When constructing a trading portfolio investors have numerous factors they have to consider before they start to trade.
Before we begin, a few basic rules.
- The first rule is to never invest or trade any capital that you cannot afford to lose.
- Secondly, we don’t recommend allocating more than 2-3% of your overall investment capital towards your total crypto trading allocation.
- Thirdly, size each trade properly and never put more than 10% of your total crypto trading allocation into any one trade.
- And finally, if you are new to trading crypto, you will want to start very small ($50-$100 per trade is more than enough) to get a feel for the market, the exchange interfaces, and the volatility.
Traders should have a definite understanding of risk-reward, risk-reward ratio, margin levels per trade, time frames of each individual trade, current market conditions and the phase of the market cycle they’re dealing with.
Risk vs. Reward
Risk reward essentially measures how much your potential reward is for every dollar that you are willing to risk. Traders should carefully select trades based upon the best potential risk reward.
The risk-/reward ratio measures the difference between a trade entry point to a stop-loss and a sell or take-profit order. Comparing these two provides the ratio of profit to loss, or reward to risk.
Traders should ideally have the most favorable risk-reward ratio when selecting a trade as they ideally want to get paid more for taking additional risk in the market.
For example traders should expect to gain twice the amount they wish to risk. This gives them a 1:2 risk-reward.
A risk-reward of 2:1 is considered fairly normal, while a risk reward of 1:4 is considered good. For example, a trader could risk $10 on a trade in the hope of making $40 back with a 1:4 risk reward ratio.
Traders can use various time frames in order to achieve the best investment result. These time frames are categorized by short, medium, and long-term.
Short-term trades typically take between a few hours to a few days. Traders can therefore capitalize on short-term fluctuations in the market.
Risk reward for short-term trades is generally lower than medium or longer-term trading.
Short-term trading is considered more risky than medium or long-term trading as individuals are more exposed to market volatility with a smaller margin of error.
This type of trading style is suitable for traders for a higher tolerance for risk.
Medium-term trading is less risky than short-term trading, and is based upon trades taking a few weeks to a few months to work. This type of trading style suits traders with a moderate tolerance for risk and less time on their hands.
The risk-reward for medium-term trading is generally lower than long-term trading, but higher than short-term trading.
Long-term trading is less risky than short and medium-term trading, and helps traders align themselves with the prevailing market trend in order to achieve the best results.
Typically long-term trades take between 4-6 months. Longer-term trading suits trades with a low tolerance for risk and for investors with less time on their hands.
The risk-reward for longer-term trading is usually higher than short or medium-term trading.
Margin trading, also known as leveraged trading, is a form of trading that uses borrowed funds in order to trade larger amounts of a specific asset. For example, if you have 1 Bitcoin on Binance, you can borrow up to 2 Bitcoins more and trade as if you had 3 Bitcoins.
While margin trading increases your profits when successful, it also accelerates your losses when unsuccessful.
If a margin trade goes in the wrong direction, a trader will be required to add funds to their accounts in order to avoid order liquidation. This is known as a margin call. If a trader is unable to provide further funds to secure an order, it will be closed out automatically.
Using too high trading leverage is both profitable and risky. It can increase profits, but can also cause a Margin Call or account liquidation to happen on much relatively price movements.
Traders should have a full understanding of current market conditions before they start to trade.
For example, is the overall cryptocurrency market bullish or bearish at the present moment? Another possibility is that the asset class is moving sideways — with no strong bias either up or down.
Having a full understanding of current market conditions will allow traders to best utilize short, medium, and long-term trading strategies.
Markets are subject to four phases: Accumulation, Advancing, Distribution and Declining.
During the Accumulation Phase, the market enters into an extended period of price consolidation. This market may trade sideways for many months while trading indicators start to flatten out, such as moving average and momentum studies.
During the Advancing Phase the market forms an uptrend, breaking away from range bound conditions. Typically, price starts to firm above the 200-day moving average on a consistent basis. The cycles are often known as bull markets and can last for months, or even years.
During the Distribution Phase, price starts to enter into an extended period of consolidation, with moving averages flattening and ranges tightening.
During the Declining Phase markets enter into a bearish trend where price continues to drop and consistently trade below its 200-day moving average. A bear market can once again last for months or years.
The risk calculator is the percentage per trade we advise BTC traders to risk during various market cycles.
|Market Phase||Risk Per Trade||Time Period|
|Strong Bull Market Phase||10%||All|
|Weakening Bull Market Phase||5%||All|
|Accumulation/Distribution Market Phase||5%||All|
|Strong Bearish Market Phase||10%||All|
|Weakening Bearish Market Phase||5%||All|