The most risky method should also be divided into three times. In other words, you should give yourself at least three chances.
1. For instance, if the total account capital is 200,000, and the client allows a maximum loss of 20%, that is 40,000, then I suggest the most risky loss scheme to be: first 10,000, second 10,000, and third 20,000. I believe this loss scheme still has a certain rationality because if you get one of the three right, you can profit or continue to survive in the market. Not being kicked out of the market is already a form of success, and it gives you a chance to win.
2. Grasp the overall market trend. Trends are much harder to navigate than consolidations because they require chasing prices up and down, necessitating discipline in holding positions, whereas buying high and selling low aligns more closely with human nature. Trading becomes less profitable the more it aligns with human nature; it is because it is difficult that it is profitable. In an upward trend, any violent pullback should prompt a buying decision. Remember what I said about probabilities? So, if you are not in the market or have exited, patiently wait. When there is a drop of 10-20%, be bold and buy.
3. Set stop-loss and take-profit targets. Stop-loss and take-profit can be said to be the key to determining profitability. In several trades, we must ensure that total profits exceed total losses. Achieving this is not difficult if the following points are met: ① Each stop loss ≤ 5% of total funds; ② Each profit > 5% of total funds; ③ Total trading win rate > 50%. If these requirements are met (with a profit-loss ratio greater than 1 and a win rate greater than 50%), profitability can be achieved. Of course, high profit-loss ratios with low win rates or low profit-loss ratios with high win rates can also work. Anyway, just ensure overall profitability is positive, that is, total profit = initial capital × (average profit × win rate - average loss × loss rate).
4. Avoid excessive frequent trading. Since BTC perpetual contracts trade 24/7, many novices trade every day, and during a month with 22 trading days, they might trade nearly every day. As the saying goes: if you walk by the river often, how can you avoid getting your shoes wet? The more you operate, the more likely you are to make mistakes. After making a mistake, your mentality can deteriorate, and a bad mentality may lead to impulsive actions, choosing 'revenge' trades that may go against the trend or involve heavy positions. This can lead to a series of mistakes that result in huge losses on the balance sheet, which might take years to recover from.
The bottom line that must be adhered to in contract trading
Contract trading carries extremely high risks, and making money under such high risk fundamentally requires good risk management. This is often stated as making more when you profit and losing less when you incur losses; this principle is even more applicable in contract trading. Therefore, I will first discuss the importance of risk management in contract trading as a whole, and then highlight a few important risk management aspects.
It can be said that making money in contracts is neither easy nor hard. Earning is easy for one or two trades; the hard part is maintaining stable profits over the long term. In front of the market, we are all small retail investors and should lower our expectations, focusing on profitability without pursuing win rates, the lowest or highest points, and avoiding the desire for quick wealth. It is normal for a single trade to be right or wrong; do not let this affect your mentality. Just stop loss promptly. If you earn little in one trade, earn more in the next few, and gradually accumulate over time. Never be impatient. These thoughts are like a sword of Damocles, potentially bringing you catastrophic consequences in certain market situations.
Essentially, the nature of the trading market is captured in the words greed and panic. To make money, one must find ways to overcome human weaknesses: do not be greedy when you shouldn't, and do not be fearful when you shouldn't.
It is very important to adhere to your own thinking. The cryptocurrency market is still quite small, and there are not many trading counterparts. The essence of making money lies in maintaining personal thought; if you go with the flow and follow others, it would be good enough to avoid losses, let alone make profits.
Therefore, in contract trading, you must strictly adhere to the trading discipline you have set for yourself: do not be greedy, do not take chances. You cannot be complacent because of a single moment of non-compliance and profit, nor can you be frustrated for missing an opportunity due to adherence to discipline. Discipline is ironclad; it is the bottom line that must be strictly followed at all times.
All of this is aimed at good risk management, lowering the probability of fatal mistakes. By adhering to the following points, making money will be a high probability event:
1. Reduce leverage
You must ensure that the actual leverage of your positions does not exceed 2-3 times. Of course, it is best if it is around 1 time. If you are in a full position mode, you must set take profit and stop loss to prevent a total loss during significant fluctuations like on 9.25.
2. Learn to set stop losses
This point is very important, and I'll say it again. Retail investors lose a lot of money not because they set stop losses but because they face liquidation. Market fluctuations are inherently unpredictable. Those who make money are generally those who earn more when they are right and lose less when they are wrong. Stop losses help minimize losses when things go wrong. Retail investors should do the same; if you make a mistake, you must acknowledge it promptly and set a stop loss. You must not hold on to losing positions. Set a loss percentage that you can tolerate, such as 15% or 30%, depending on your situation. Once you reach your maximum loss percentage, do not gamble on waiting it out, nor should you think that since you've lost so much, you might as well hold on. In short, regardless of the situation, you must set stop losses. You may not feel it once or twice, and sometimes you may realize you shouldn't have stopped loss after the fact, but over time, you will see the benefits. For example, before the 9.25 incident, if you kept opening long positions, even though it was easy to hit stop losses and you felt frustrated each time, looking back at how many people faced liquidation that night with 2-3 times leverage should make you grateful for your wise stop loss. In short, a stop loss is merely cutting a small part; not setting a stop loss is equivalent to suicide.
3. Reduce frequency
This should go without saying; everyone understands that the more you do, the more mistakes you will make. If you happen to make a mistake during a loss, the consequences can be even worse. Therefore, in trading, strive to do the right thing. Reduce trading frequency, grasp high-probability opportunities, minimize mistakes and losses, which is beneficial for both profit output and mental adjustment.
4. Capital management
Capital management is, in my opinion, the most important aspect of trading. Mastering good capital management strategies can protect the principal well, reduce drawdowns, and preserve profits, ultimately significantly increasing your risk tolerance. Capital management determines whether you can make money and is the lifeblood for long-term survival in the trading market.
Here, a few points of discipline need to be mentioned separately.
(1) Always keep your principal not fully invested. Even leaving 10% of your capital uninvested will help you appreciate the discipline you adhered to in extreme risk situations. I generally leave 10-20% of my funds uninvested and occasionally engage in short-term altcoin trades, generally holding positions for less than 24 hours before exiting.
(2) Contracts and spot trading must be kept separate, which serves as a risk isolation measure. The spot portion should not use any leverage; trading should only benefit from the rise in spot prices. The contract portion can occupy 20-30% of the total capital; in a very certain trending market, it should not exceed 50%. For the contract portion, use low leverage operations to anchor returns based on the cryptocurrency, and after achieving stable profits in the contract market, the returns based on the cryptocurrency will also be considerable.
(3) Avoid excessive dispersion of funds. Concentrate your funds on a few relatively strong currencies; do not spread them too thin. Reduce the number of assets traded simultaneously. For example, do not think about opening contracts for Bitcoin, Ethereum, EOS, and Litecoin at the same time; that is something only experts do, aiming for maximum returns. As retail investors, we should first pursue returns, not maximization. Moreover, trading too many assets will only increase risks and will not magnify profits. Therefore, it is best to concentrate your efforts on increasing the win rate; this way, it will be much easier to generate profits compared to spreading funds across several assets.
5. Reflect often and summarize frequently
The entire trading process has only a few steps: Determine the market direction - Find the entry point - Determine position size - Add positions based on market conditions - Take profit and stop loss. Essentially, these are the main points. After completing a trade, reflect frequently. Identify which part of the trading process you were weak in and focus your efforts there to ensure you have good discipline to follow and execute in different trading stages. Summarize the successful experiences and lessons from trades; with long-term persistence, you will surely reap rewards.
This is what I want to express about contract trading. I did not discuss opening techniques and strategies but chose these seemingly common thoughts and ideas because I believe these foundational thoughts are more important, practical, and essential to master. They are like the foundation of a tall building; only with a solid foundation can the upper floors look better. Therefore, after understanding these basic principles, one should also possess certain technical analysis skills and grasp some trading techniques and strategies. The cryptocurrency market's contracts will then become your ATM.
But in any case, contracts are a high-risk gambling market; safety comes first. I wish everyone can make a fortune in the cryptocurrency world.
Turning the tide against the trend yields astonishing returns! Keep pace to easily achieve wealth growth.
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