What is position management?
Position management refers to the comprehensive management of plans for building positions, increasing positions, decreasing positions, and how to liquidate when you decide to enter the market. Good position management is one of our essential means of avoiding risks, maximizing benefits, and minimizing losses!!
So what is position?
Position refers to the total amount of money you use for trading and the proportion of completed trading funds.
For example, if you have 100,000 yuan for trading and have already used 30,000 yuan to buy cryptocurrencies, then your position is 30%, which means you have 3 layers of position. This buying behavior is called opening or building a position.
If half of the total capital is used for buying, it is called a half position. If the capital used for buying is a small proportion of the total, it is called a light position. If it is a large proportion, it is called a heavy position. Buying again after establishing a position is called increasing position. Selling part of the position is called reducing position. Fully selling is called liquidating. Holding without selling is called holding a position. Always retaining part of the position without operating is called base position. Selling everything and not buying again is called being flat.
The above are terms related to position management.
Position management is part of the entire trading system. Different market conditions require different trading strategies, so the methods of position management also vary under different strategies. But regardless of the method, there are several fundamental principles.
First: Do not operate with a full position; always maintain a certain ratio of reserve capital. Operating with a full position is like going to war without backup troops. Especially in unstable market conditions, full position trading can lead to a passive situation where one is forced to sell at a loss if the market drops. If one does not sell, there will be no excess capital to increase positions and average down costs. When other market conditions arise again, there may be no capital left to utilize or one may have already lost and exited. Holding a full position can create an imbalanced mindset due to market fluctuations. Full position trading has a higher probability of liquidation rather than the fantasy of becoming rich overnight.
Key point noted.
Second: Batch buying and selling, reducing risks, averaging costs, and amplifying gains. The advantage of buying in batches downwards and selling in batches upwards is that you achieve a lower average price than others, resulting in higher returns.
Thirdly: When the market is weak, one should hold a light position; in a bear market, it is best not to exceed 50% of the position. When the market is strong, one can appropriately hold a heavier position; in a bull market, it is recommended to limit the position to 80%, keeping 20% as short-term or reserve capital to respond to unexpected occurrences.
Fourthly: As the market changes, corresponding position adjustments should be made, appropriately increasing or decreasing positions.
People are alive; when the market is strong, I can appropriately reduce positions to capture some profits. When it is weak, I can appropriately increase positions to lower costs. This is about making corresponding adjustment actions.
After increasing the position, even a slight price rebound will be very close to the cost or exceed it.
For example: when the trend is clearly downward, one should reduce positions. When the trend stabilizes and begins to rise, one should increase positions. When there is uncertainty about the market, do not hold heavy positions or increase positions lightly. If support is seen, one can increase positions; if resistance is seen, one can reduce positions and realize profits.
Fifth: When the market is sluggish, one can temporarily hold a short position while waiting for opportunities to arise.
At the end of a bull market, the beginning of a bear market, or before a bottom stabilizes, one can hold a short or light position temporarily while waiting for opportunities. However, as long as you want to fight in this market for the long term, do not remain in a short position for too long. Long-term inactivity can lead to a gradual loss of sensitivity to market changes and trading feel. Alternatively, one can operate in a bear market with a small amount of capital to summarize experiences and techniques, and train their trading feel. Operations in a bear market can be strategically arranged at the end of a bull market or the beginning of a bear market. This point is very important.
Sixth: Change positions: retain strong cryptocurrencies while selling weak ones.
Whether rising or falling, as long as there is volatility, it is a good market. Volatility brings opportunities to make money. If a cryptocurrency remains flat for a long time or has a small range of fluctuations, it is necessary to flexibly change positions; do not fall in love with a particular cryptocurrency, make rational choices, and seize other market opportunities.
The above six principles apply to both spot and futures.
Next, let's discuss the methods of position management, which is batch operations.
Batch operations refer to the act of splitting invested funds for building positions, increasing or decreasing positions. Batch operations can be completed in one day or over a period of time.
Why do these actions? Because the cryptocurrency market is unpredictable; both rises and falls are highly probable events, and no one can accurately predict short-term price fluctuations. Therefore, it is essential to leave enough capital to cope with unpredictable fluctuations.
If you operate with a full position without sufficient confidence, once the market changes direction, it can lead to massive losses. Therefore, using batch methods can reduce the risk of full position investment, lower costs, and is the basis for amplifying profits.
Next, let’s discuss how to batch: there are equal batch and unequal batch operations.
First: Equal distribution, also known as rectangular trading method, refers to dividing funds into several equal parts and buying or selling in sequence, with the same proportion of capital for each transaction. Typically, 3 or 4 equal parts are used. For example, first buy 30%, if profits are obtained, buy another 30%; if there are no profits, temporarily refrain from investing new funds. When the price of the cryptocurrency reaches a certain high point or the market changes, gradually reduce positions and sell.
Second: Unequal distribution, referring to buying or selling funds in different proportions, such as 1:3:5, 1:2:3:4, 3:2:3, etc. Based on the proportions, the shapes can be categorized into: rhombus, rectangle, hourglass, etc. The pyramid trading method is commonly used.
Thirdly: Using the same capital and positions, comparing with different methods.
Pyramid: Buy 5 layers at 1000, buy 3 layers at 1100, buy 1 layer at 1200, average price 1055.
Inverted pyramid: Buy 1 layer at 1000, buy 3 layers at 1100, buy 5 layers at 1200, average price 1144.
Equal rectangle: Buy 3 layers at 1000, 3 layers at 1100, 3 layers at 1200, average price 1100.
When the price rises to 1200, the profits are: pyramid 145, inverted pyramid 56, rectangle 100.
When the price drops to 1000, losses are: pyramid +55, inverted pyramid -144, rectangle -100.
Comparing, it can be seen that the pyramid type incurs the least cost, and profits are greater when prices rise. When prices fall, the risk is greater. The inverted pyramid is exactly the opposite; if the price drops to 1000, the inverted pyramid loses 144. In practical application, it is more reasonable to adopt the upright pyramid method when buying and the inverted pyramid method when selling.
The comparison above clearly demonstrates the role of position management.
After a significant drop in cryptocurrency prices, when it is uncertain whether a bottom has been reached, if we buy at this time, we fear further declines and being trapped. If we do not buy, we worry about missing out on a rebound. In such cases, we can use the pyramid position building method.
For example: If a cryptocurrency drops to 10 yuan, buy a 20% position. If the price drops to 8 yuan, then enter 30%. At this point, the average cost is 8.6 yuan. If the market continues to drop to 5 yuan and then enters 40%, the average is 6.5 yuan. If the price rebounds to 6.5 yuan, it will break even. If it rebounds to 10 yuan, it means a profit of 3.5 yuan. But if you bought in fully at 10 yuan, when the price returns to 10 yuan, you will just break even.
During the process of rising prices, the lower the price, the larger the buying position should be, and as the price gradually rises, the position should gradually decrease. This method of buying belongs to right-side position building. This cost is relatively safe; even if the market drops, as long as it does not fall below the holding cost, there is no need to panic.
This method has a heavier initial position, so it requires higher demands for first-time entrants and requires a grasp of market fluctuations, making it suitable for technical players.
Inverted pyramid selling method, opposite to the upright pyramid, has a wider top and narrows downwards, resembling a funnel. When the price of the cryptocurrency rises, gradually reduce the amount of held coins, meaning the number of coins sold increases as the price rises. This is about reducing or liquidating positions.
The core of position management is the above points. Once understood, I believe in the future, whether for spot or futures, you will have a clear approach.
Finally, let me share some personal suggestions for effective trading.
Firstly: Technical aspects, including technical indicators, candlestick patterns, and trading volume. Judging trends, distinguishing between bull and bear markets, grasping buying and selling points, assessing support and resistance, and using volume-price-time-space. This varies from person to person; some people do not understand technology and have no interest, so there is nothing that can be done.
Second: Fundamental analysis, including related macroeconomic factors, policies, regulations, and the project itself.
Thirdly: News aspects, operating under favorable macroeconomic conditions and good fundamentals.
Fourthly: Time cycles, intra-day short-term, medium-short term, medium-long term, long-term (trend trading), confirm the trading cycle to achieve consistency in operational cycles. For example, when trading long-term, do not frequently engage in short-term buying and selling. When trading long-term trends, intermediate adjustments and fluctuations are acceptable as long as there is sufficient space and it is a mainstream cryptocurrency; the price will rise again.
Fifth: Mindset control, remember not to fidget; implement your plan once it's made. Do not cut corners; these are personal insights and experiences. What you learn becomes yours; if you can't learn it, there is nothing that can be done. Two key points: first, the methods and functions of position management.
Still the same, if you don't know what to do in a bull market, click on the icon of Kuige and follow for bull market spot planning, contract strategies, and free sharing.
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