Risk-free trading techniques
- Capital management
- Hedging
- Using Stop-loss in trading
- Determining the stop-loss ratio to the take-profit in trades
- Trailing stop
Capital management:
Capital management is a practice in which the investor divides his capital into different categories and assigns a certain percentage of the total capital to each sector (for financial market traders, this means that each trader invests a certain percentage of his entire capital in each trade, and it is better for this amount not to exceed 2-3% for each trade) to reduce the risk of losing the entire capital due to market fluctuations. That reduces the impact of a wrong trade's loss.
Read More: Capital management, the best trading strategy in Forex
Hedging: Hedging is another strategy to reduce trading risk. This strategy involves entering into one trade to offset a loss incurred from another trade. Traders often use symbols with correlation and simultaneously enter into trade in the same direction on two symbols with negative correlation or trade in the opposite direction on two symbols with positive correlation. For example, the EUR/USD currency pair is correlated negatively with the USD/CAD currency pair. Suppose you open a buy position on the EUR/USD currency pair, and after a while, you think maybe you were wrong. In this case, you can create a buy position on another currency pair with a negative correlation to compensate for the first trade's loss in the second trade. (Trading in two opposite directions on a currency pair can also be a hedging strategy in trading).
Read More: What is a currency pair?
Using Stop-loss in trading:
Note that different technical and fundamental analysis methods are always associated with an error percentage, and there is no certainty in trading. Therefore, the best way to reduce the risk of trades is to use stop-loss in transactions. When you enter a sell trade, you expect the price to decrease, but you should note that there is a possibility that the price will go up. That is why you should specify a price range higher than the transaction entry point so that if the price reaches that area, exit the trade with a loss.
That reduces the possibility of further losses for the transaction and does not allow you to lose all your capital in one trade. (The stop-loss amount and its ratio to take-profit are determined according to the trading style, but the stop-loss should never be more than take-profit. We will explain the reason further in this topic.)
Determining the stop-loss ratio to the take-profit in trades: After setting the take-profit and stop-loss for trades, you must note that the take-profit ratio to the stop-loss should be set with a certain fixed ratio in a way that the take-profit amount (trade entry point to trade exit point in profit) is more than the stop-loss. If you are a scalper, the take-profit ratio can be between 1 and 1.5 times the stop-loss, but if you are a swing trader, this amount can increase up to 2 - 3 times.
For example, when your take-profit is two times the stop-loss, and after making ten trades, you have five profitable trades and five losing trades (the win rate of your trades is 50%), you will earn ten units of profit and have only five units of loss. And with the same number of profit and loss trades, you will still profit from the market. That's why we recommend that the take-profit be higher than the stop-loss.
Trailing stop:
As a trader, your task is to get the most profit possible from the market and exit the trade with the lowest loss amount. One of the methods that will help you gain more profit in the best possible way is the trailing stop. You can use the trailing stop by setting the stop-loss for exit in your profit area when your transaction enters the profit zone.
For example, you buy a share at $10 and set your stop-loss at $8, and after a while, the price of that share becomes $14. You predict that the price will increase to $16, so you set your target at this price, but if this share drops and goes down to $8, in addition to not making a profit, your trade will be closed with a loss. That is why the variable stop-loss strategy says that based on different methods, the stop-loss exit point can be placed in the profit area when the price enters the profit zone. Further, we will explain some of the most significant trailing stop methods.
Types of Trailing Stop Determination Methods
- Price Action
- Using Moving Average (MA)
- Resistance and Support Levels
- Candlesticks
Price action: In this method, you can place your stop-loss behind the corrective wave and remain in the trend direction in your transaction by recognizing the market trend after the corrective movement formation.
Using Moving Average (MA): In this method, you can place your stop-loss behind the Moving average. Which period to use for the moving average depends on your time frame and trading style.
Read More: Moving average indicator
Resistance and Support Levels: Support and resistance levels are suitable places for trailing stops, which include static and dynamic support and resistance. In determining the stop-loss, using static areas is preferable to dynamic areas.
Candlesticks: Candlesticks alone cannot be effective in market analysis, but using them for trailing stops can be very helpful. A full-body candle's top and bottom areas can be suitable for placing the stop-loss.
Risk-free trading tool
Arbitrage: Arbitrage means using the price difference of two symbols or shares in different markets. People can make a good profit by using arbitrage. Arbitrage in the crypto market is possible due to the price contrasts between different exchanges. For example, let's say you want to buy Bitcoin. On one exchange, Bitcoin's price is $1,000, while on another, it is $1,050. Here, you can buy Bitcoin for $1,000 on the first exchange and then sell it on the second exchange for $1,050. You can earn this price difference as your profit.
Summary
We never have a strategy without loss and 100% profit in the financial market. You should enter the market by accepting that trades are always associated with losses, but to gain continuous profit from the market, you must always try to reduce your losses to the lowest possible level and get the most profit from the market.
