Issue #10: The Simple Risk Management Tactic I Wish I Knew When I Started
Without this risk management tactic, I lost $1,000 but could have gained $5,000. Read the issue to avoid the same mistake and stay consistently profitable.
Reading time: 3 minutes
Back in 2021, I made a costly mistake trading Loopring (LRC). It was a lesson that, while painful, serves as a valuable teaching moment for you and me. If I’d known what I’m about to share, I’d be significantly wealthier today.
The Setup
In 2021, rumors about a potential partnership between Loopring and GameStop (GME) sparked market excitement. LRC's price surged as traders speculated on the announcement. Spotting an opportunity, I entered at $0.60, expecting to capitalize on the "buy the rumor, sell the news" strategy.
As LRC climbed to $3.83, the partnership rumors proved true. However, the price crashed hard soon after. Instead of locking in gains, I lost $1,000 due to poor risk management and an ill-advised decision to buy more at $3.60 just before the downturn.
The Fix
Use Trailing Stop Losses: Protect profits as the price moves up and prevent significant losses during reversals.
Use 3 EMAs: 8-day, 21-day, and 30-day exponential moving averages (EMAs) help track price trends and identify dynamic support.
Adjust Timeframes Based on Volatility: For volatile assets, use shorter timeframes (15-minute to 3-hour). For less volatile assets, use daily or longer timeframes.
How It Works
Entry and Initial Stop Loss
My entry at $0.60 was fine, but as a trader (not an investor in this scenario), I should have set an initial stop loss at 10% below my entry. This is basic risk management and would’ve limited my downside from the start.
Identifying Support Levels
Once LRC made a higher high, I should’ve searched for a higher low to confirm a support level.
In Fig. 1, the blue circle 1 highlights the first major support zone at $0.70. Setting a stop loss 10% below this ($0.63) would have secured a 5% gain while allowing for natural price fluctuations without triggering the stop prematurely.
At the same time, I should have relied on the 3 EMAs to track the trend and dynamic support levels. The 30-day EMA, in particular, serves as the final safety net. If the price breaks below this EMA, the trend is likely reversing, and the most recent stop loss would trigger.
In circles 2 and 3, the next major lows formed new support zones (Fig. 2). Each time, I should’ve updated my new stop loss to 10% below the newly confirmed support price.
The Exit
The final stop loss should have been set at $2.73 after the last support level formed (Fig. 3).
Shortly after, LRC experienced a sharp decline (Fig. 4). Thus, the trailing stop loss at $2.73 would have triggered and exited the trade with a 4.55x profit.
I hope this helps you avoid the mistakes I made in the past.
Thank you for reading! See you again tomorrow!
Hi! Just wanted to make sure I got this - the stop loss will automatically sell if the price goes below a certain point? If investing long-term wouldn’t that cause problems if there is a sharp decline in the markets?