Optimized money management for altcoin trading
There are two things which you need, if you want to achieve high reward by doing (day) trading. First you need to analyse chars and speculate about future price of your assets being traded. Second you need a proper money management system to reduce risk. Otherewise you probably loose everything!
This article is about implementing a proper basic money management system for altcoin trading purposes.
Classic money management
The basic idea of money management is to limit the risk per trade. A common example is to stick to the rule, to not risk more then 1% of your free capital per trade. For example, if you have 10,000 USD free capital for trading, you should not risk more than 100 USD per trade. This should be ensured by calculating the number of contracs of an asset that can be bought using your prefered stop loss. Keep in mind: First you need to define your stop loss, and second you calculate the number of contracts to buy.
Use following forumula:
number of contracts = your free capital * 0.01 / (entry price - stop loss price)
For example, if you buy bitcoin at price 110 USD using 100 USD stop loss, then you should buy 10 bitcoin, in case you have 10,000 USD capital. Buying these 10 bitcoin would require a buy power volume of 1,000 USD. In some cases with small diffrence between entry price and stop loss price, you can achive very high volumes without even more risk! This will optimize your reward. In some cases, you won't be able to buy that high volume. If you want, this is your chance to do leverage trading by using something like CFD or you just buy bitcoin on credit.
Problems with altcoin trading
When doing altcoin trading, you could just trade each altcoin using your home currency such as USD. But in most cases your exactly needed trading pair is not available. This is your problem number one. For example you wont find the trading pair STEEM in EURO. Another problem: You will maybe run out of USD liquidity by stacking bitcoin, ethereum, steem and all altcoins around there. In such cases, you should consider to not trade against USD, but to trade against bitcoin as your main currency. This effectifly means to short bitcoin. This means to not invest in bitcoin too much and to spread your assets better!
When trading altcoins against bitcoin as main currency, you need to stick to proper money management system more strictly, as altcoins can be very volatile. And you really don't want to loose all your bitcoin to a crashing altcoin.
Doing proper money management with altcoin trading against bitcoin, a bit of a modification is needed. Use following formula:
contracts = your free capital * 0.01 / BTC price / (altBTC1 - altBTC2)
Whereby...
- contracts is the calculated number of altcoins you should buy
- your free capital is given in USD
- BTC price is the current BTC price in USD
- altBTC1 is the current altcoin price in BTC
- altBTC2 is your stop loss altcoin price in BTC
Summary
Money Management with altcoin daytrading just means to convert your amount of capital to be risked to bitcoin. And then divide by risk per contract. Thise easy technique boosts your performance and limits your risk. For the bitcoin market, this means better liquidity and probably a higher price.
In case you are interessted, the web provides much more details about money management techneques, but that is not part of this article.
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Good luck, good trade! :-)