We are now considering the following steps to combine your trading strategy with a financial instrument you prefer to speculate or invest in. Strategy and instrument are of paramount importance if you want to thrive in the market.
Step 2. Choose a method to control risk
There are two options to reduce the risk of your trading strategy. Investors avoid a lot of risk by diversifying their investments. Speculators do the same thing by setting Stop Losses. There is no third way.
Briefly, the scheme is:
- A market participant who applies diversification is an investor.
- Anyone who trades with a Stop Loss is a speculator.
- If you do not use either one or the other, you bring money to the market to give it to someone from this list’s first or second group.
Step 3: Choose a timeframe
If you are an investor, you will use daily bars and look at weekly ones. In general, this is correct. But for speculation, everything will be more enjoyable.
More details
Look, the most essential thing that is determined by the timeframe is the size of the Stop Loss. Because this size always depends on the current volatility, that is, price fluctuations. After all, the price does not move straight. It meanders and tries to deceive you. For example, you can use a 0.3% Stop Loss for 5 or 15-minute bars. Of course, this is not suitable for the daily timeframe.
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Example
At today’s Bitcoin price, the Stop Loss size should be at least $2000 for trading daily timeframe. This is more than four percent of current prices. If the size is smaller, you will constantly knocked out and end up with a long string of losing trades. It is clear that a value of 4% is not even close to suitable for intraday trading.
Strategy and instrument: Stop Loss size
In turn, the size of the Stop Loss directly affects the number of open positions. Also, the type of the funds curve in your trading account, that is, Equity, greatly depends on this amount. Many bad trades in a row look very ugly on the chart and are challenging to bear psychologically. In addition, the total amount of all commissions you must pay also depends significantly on the number of transactions.
Now, you can see how important something as simple as choosing a timeframe for your trading strategy is. Choose wisely!