Lesson Twelve

Yibo said that the valuable knowledge provided by the crypto host is worth saving for future reference.

Today, our topic is about every cryptocurrency trader’s “pocketbook” — capital management and stop-loss. Some of you may have made a fortune in the market, while others have experienced the helplessness of losing everything overnight. The cryptocurrency market operates 24/7, with no price limits, and contains hidden risks like exchange failures and leverage risks. To survive long-term and even achieve stable profits in such a market, luck is not enough; scientific capital management and strict stop-loss strategies are essential. Today, I will share this practical guide with everyone, so we can avoid traps, protect our principal, and earn real money.

First, we need to understand a core question: why are capital management and stop-loss so important?

The unique risks of the crypto market require us to be aware. Unlike stocks, which have daily price limits, you might wake up to find your position halved overnight; centralized exchanges can crash or even run away, like the FTX incident, causing many stop-loss orders to fail; high leverage contracts are a “double-edged sword”—even if your direction is correct, small fluctuations can force liquidation due to insufficient margin. Capital management and stop-loss are our “moats” against these risks.

Capital management essentially means rationally allocating funds and controlling position sizes, ensuring each trade’s risk is within our capacity. The core principle is simple: control risk per trade within 1%-2% of total funds. What does that mean? For example, if you have 100,000 yuan, your maximum loss per trade should be 1,000-2,000 yuan. Even if you lose several times in a row, you won’t be severely hurt. Stop-loss is setting a “bottom line” for each trade; once reached, it automatically exits to avoid letting small losses turn into big ones due to “hope for a rebound.” It not only protects the principal but also helps verify our strategy—if we frequently hit stop-loss, it may indicate entry timing or trend judgment issues that need adjustment.

Next, let’s move into practical steps: first, determine how much risk you can bear.
Everyone’s risk tolerance is different, so don’t follow the crowd blindly. First, assess your financial situation: is the money used for trading idle funds? Will it affect your daily expenses, rent, or loan repayments? If it’s emergency money, never enter the market. Second, understand your mindset: simulate if your position drops 10%, would you panic and make reckless moves? If yes, you need to reduce your risk exposure. Also, review your trading history—what was your biggest loss before? Avoid repeating the same mistakes.

Additionally, consider market conditions. If you’re trading small-cap tokens with high volatility, be more cautious and buy less; if using leverage, calculate your maximum acceptable multiple. For perpetual contracts, don’t exceed 5x leverage; for spot trading, keep it under 2x. In extreme market conditions, even lower, below 1x, to avoid liquidation. Never be tempted by high leverage, or you risk being wiped out.

Once you’ve determined your risk capacity, the second step is to calculate how much to buy, i.e., position sizing.

Here are three common methods, each with advantages and disadvantages, for you to choose based on your situation. The first is fixed proportion: use only 1%-2% of total funds per trade. It’s safe but may earn less in a strong upward trend, requiring frequent adjustments. The second is the Kelly formula: calculate the optimal proportion mathematically, which can maximize profits theoretically, but requires accurate estimation of win rate and risk-reward ratio. Mistakes can lead to losses; use cautiously if you’re a beginner. The third is dynamic adjustment: adjust position size based on account profit/loss and market volatility—add positions when profitable, reduce when losing. It follows market trends but needs historical data support, which may be complex for beginners.

Regardless of the method, remember two principles: first, diversify investments—don’t put all your money into one coin, and keep single-asset holdings below 15% of total funds; second, prioritize mainstream coins like Bitcoin and Ethereum, which have good liquidity, making it easier to sell without causing losses due to lack of buyers.

The third and most critical step is: how to set effective stop-loss?

Stop-loss isn’t random; it requires skill. The first method is fixed percentage stop-loss: set a maximum loss of 2% of total funds per trade, and close the position automatically when reached—no hesitation, no luck-based decisions. This helps overcome emotional trading.

The second is trailing stop-loss: for example, if the price rises 10%, move the stop-loss to the cost basis; if the price falls back, you won’t lose principal. If the trend continues upward, adjust the stop-loss accordingly to lock in more profit. This method suits trending markets and allows profits to “fly.”

The third combines key support and resistance levels: support is a historical price level that tends not to fall below; resistance is a level it struggles to break above. For long positions, set stop-loss 1%-3% below support; for short positions, 1%-3% above resistance. Use ATR (Average True Range) to adjust the buffer—wider in volatile markets to avoid being shaken out by small fluctuations. Also, note that different trading timeframes have different key levels: intraday trading uses 15-minute charts, swing trading looks at 4-hour or longer charts.

While setting stop-loss, we must also focus on a core concept: risk-reward ratio.

Simply put, it’s “how much profit for each unit of risk.” The formula is (target profit price – entry price) ÷ (entry price – stop-loss price). For example, a 1:2 ratio means risking 1 unit to gain 2 units. The higher the better, ideally above 1:1.5. But don’t chase overly high ratios like 1:5, which can lead to frequent stop-losses and losses. When calculating, also deduct fees and slippage—the difference between expected and actual transaction prices—otherwise, the profit might not cover costs. Adjust ratios based on market conditions: in early trend phases, set around 1:3 to catch main upward waves; in late stages, reduce to 1:1 to lock in profits; during black swan warnings, like soaring market fear indices, consider lowering to 1:0.5 to preserve capital first.

Finally, let’s look at how to apply these strategies in practice and avoid common pitfalls.

For example, in trend trading Bitcoin, confirm an uptrend with moving averages, then enter, and set a trailing stop-loss below the moving average to protect capital. For Ethereum swing trading, buy at support and sell at resistance, risking no more than 5% of capital per trade to avoid large impact from single losses. For arbitrage, monitor price differences across exchanges, buy low and sell high in stablecoin pairs, and execute quickly, accounting for fees.

Now, common pitfalls and solutions: first, emotional trading—chasing gains or panicking after losses. Solution: pre-plan trades, use automation tools, and set “cooling-off” periods—stop trading for 24 hours after three consecutive daily losses. Second, over-concentrating in one altcoin—if it crashes, you lose everything. Diversify and include mainstream coins. Third, ignoring liquidity—buying small-cap coins that can’t be sold easily, leading to slippage losses. Prioritize high-liquidity pairs and use limit orders instead of market orders. Fourth, neglecting security—using unregulated exchanges, not enabling two-factor authentication, risking theft. Choose compliant platforms, store large assets in cold wallets, and change passwords regularly.

Finally, here are best practices to improve your trading success rate:

1. Position management: divide total funds into 3-5 parts, set independent stop-losses for each, and avoid losing everything at once.
2. Strict leverage control: don’t be tempted by high leverage; avoid liquidation.
3. Regular review: keep a trading journal daily, analyze win rate and risk-reward, and adjust strategies promptly.
4. Stress testing: verify your strategy against historical extreme market data to ensure resilience during black swan events.
5. Dynamic adjustment: adapt fund allocation and stop-loss strategies based on market volatility and your account status.

Friends, cryptocurrency trading is like a marathon—not about who runs fastest, but who runs farthest. Capital management and stop-loss are the “supply stations” in this marathon, helping us survive long-term in the market. Remember, preserving capital is always the top priority; only alive can we have the chance to earn more.

That’s all for today’s sharing. I hope these practical tips help everyone. Wishing you all steady profits and safe trading in the crypto market! If you have questions, feel free to discuss after class. Thank you all!