Risk management
Welcome to step 5 of the course “Investing in bitcoins”. In this step you will learn what your risks are and how to limit them.
As we mentioned before, you can also make a loss when trading online. This can be seen with the power of leverage. Leverage not only increases your profit potential but it can also magnify your losses.
5.1 Trade with a reason
Managing risks can come in many forms. As previously mentioned, it is important to have a reason for your trade. This will help limit your risks. The reasoning is very important!
5.2. The leverage ratio
The leverage ratio works both ways. When you open a position, your investment amount is multiplied by a certain factor. This allows you to open more valuable positions. The leverage ratio also works the other way around. When you multiply your money, you can also lose more money. To avoid losing a lot of money, you can use the stop loss and profit call option. The leverage ratio can differ for each position.
5.3 Stop loss and profit call
On the trading platform, you have several options to help you trade safely and reduce your risks. Two of these options are a stop loss and a profit call.
Stop loss
Stop loss is a limit you can set to automatically close a position depending on the amount you can afford to lose. The stop loss closes your position if the price of the asset drops below the price you set as your limit. Setting a limit ensures that you are protected from unexpected, high losses. When using the stop loss, you can make your loss as small as you want, because you decide the limit. In addition, you can never lose more than the amount that you specify. It may be wise to begin trading with small amounts and only when you have more experience trade with larger amounts. In the figure below you can see the stop loss option inside the red box.
Profit call
A profit call is a limit you can set when opening positions. You can do it for any asset including bitcoin. When the price of the asset reaches your profit call, your position will be closed automatically. Setting up a profit call ensures that the potential profit is protected if it is reached. This way you secure a profit even if the price drops dramatically immediately after closing. The green box in the figure below indicates the profit call option.
Figure 1: Trading in bitcoins – Stop loss and profit call bitcoins.
5.4 Learn to control your emotions
In addition to having a a good trading strategy, it is also important to keep your emotions under control. Below are some useful tips that you can use
- Don’t make decisions based on emotions, from emotions of excitement or desperation.
- Do not panic if you incur a loss
- Make a well-considered decision and be realistic.
- Common sense and reasoning behind your investment choices will bring you a long way.
In step 6 you will learn about costs and opening hours.