What is risk to Reward? We will talk about it in this article, examining how to apply it to the world of cryptocurrencies.
The risk to reward, simplifying, is the relationship between the risk that runs if a transaction goes into loss and the gain that can be obtained in case it succeeds. Wanting to give a simple example, if I invest € 10, I expect a profit of € 3 and the possible loss is € 1, then I have a Risk to Reward ratio of 1: 3.
The ratio of 1: 3 is usually the one recommended for trading , this is because many operations may not be successful, so those with positive results must cover losses and also generate a profit.
How does this Risk to Reward apply? In trading it consists in setting stop loss orders to limit any losses and, if all goes well, make a sales order to make a profit take.
In cryptocurrency trading, setting a stop loss becomes more difficult because there may be more factors to evaluate, such as:
- High volatility : often stop loss jump, to make a correct use it becomes necessary to follow the market more frequently and update them several times throughout the day to prevent them from mistakenly clicking;
- Quotation of new crypts on famous exchanges : a new quoted crypto, for example on binance, could have an explosion of gain as it fell suddenly. Trad give these new crypts increases risks, but also gains;
Very often the whole is translated with the technique of holding, that is to maintain the crypts even if in great loss, in the hope that in the long run until the end the prices go back. A technique therefore completely in opposition to the setting of stop loss. Here the risk to reward acquires a different interpretation: selling the risk of losing the gains of a possible ascent.Although as an interpretation it would be very tight in the professional field, for private savers it can have its meaning.
The holding company, in some cases, is dictated by a lack of time to follow the trend of the crypt in a frequent manner.
A possible middle way between the holding and the stop loss can be another: have a well balanced Coin portfolio and follow the trend by manually replacing or lightening the position on those Coin that are making less or are at a loss. In this case the Risk to Reward must be applied manually and it is advisable to have a good self-control: I do not have a stop loss set on a precise threshold but manually apply a soft threshold within which to alert me, watch the price trend and case sell.