Hello Bro! Today we will discuss a new topic:
Trading on the exchange is not only an art of analyzing charts and news, but also a discipline that requires strict risk control and psychological resilience. This is especially relevant for users of Binance, one of the largest cryptocurrency exchanges in the world, where high asset volatility requires a conscious approach to capital management from the trader.
In this article, we will explore the key principles of risk management and trader psychology, as well as popular capital management models: Fixed Fraction, Kelly Criterion, and Martingale.
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Why is risk management important?
Risk management is a system of rules and procedures aimed at minimizing potential losses and protecting capital. In the cryptocurrency market, volatility can reach tens of percent in a single day, and sharp price fluctuations can not only bring profit but also destroy a significant part of the deposit. Without strict risk management, even the most talented trader will eventually lose money.
Core tasks of risk management:
• Determining the maximum acceptable risk per trade.
• Controlling position size depending on capital size.
• Using stop-losses to limit losses.
• Maintaining a balance between risk and potential profit.
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Trader psychology: control of emotions and discipline
The market forces stress — fear of missing profits or experiencing losses. This leads to typical mistakes such as:
• Excessive overconfidence after several successful trades.
• Panic and premature closure of profitable positions.
• Increasing position size in attempts to 'get back' after losses.
A professional trader must develop psychological resilience and be able to follow a pre-established trading plan, avoiding emotional decisions.
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Capital management models
Capital management is a system of rules by which a trader determines what portion of capital they are willing to risk in each trade. We will consider three popular models.
1. Fixed Fraction
Essence: to risk a fixed percentage of capital in each trade, for example, 1-2%.
Advantages:
• Ease of implementation.
• Allows controlling losses and preserving capital.
• Naturally adapts to changes in the deposit — if capital decreases, the position size becomes smaller.
Example: With a capital of $10,000 and a risk of 2% per trade, you are risking $200. If the trade goes into a loss, the next risk will be calculated from the updated capital amount.
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2. Kelly Criterion
Essence: calculates the optimal percentage of capital for the bet to maximize long-term capital growth based on the probability of trade success and the profit/loss ratio.
Formula for the Kelly bet:
\[
f^* = \frac{bp - q}{b}
\]
where:
• \(f^*\) — the portion of capital for risk,
• \(b\) — the ratio of profit to the bet,
• \(p\) — probability of winning,
• \(q = 1 - p\) — probability of loss.
Advantages:
• Mathematically optimal strategy for maximum growth.
• Considers the probability of winning and the risk/reward ratio.
Disadvantages:
• Requires accurate estimation of probabilities and ratios, which is difficult in real market conditions.
• Can result in large position sizes, which increases risk.
Practical advice: Often traders use 'fractional Kelly' — a portion of the Kelly result (for example, half) to reduce volatility risk.
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3. Martingale
Essence: to double the position size after each losing trade, aiming to recover all previous losses with the first win.
Advantages:
• Theoretically provides profit in any series of losses, if there is unlimited capital.
Disadvantages:
• Very high bankruptcy risk.
• Requires unlimited capital.
• Very dangerous in volatile markets
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