How to Best Manage Risk in Crypto Trading? | Crypto Markets Live With Charlie Burton and Naeem Aslam

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This is cointelegraph's Crypto Markets Live. Hi, everyone. Welcome to another episode of the Crypto Market Show Live. I am Giovanni, your host, and today I have the pleasure to be joined by two very cool traders, Naim Aslam, chief market analyst at Avatrade, and Charlie Borton, co founder at EasyTrader. Welcome, guys. Thank you for being with us.

Thank you for having us.

Likewise. Always nice to come back on.

In this episode, we are going to discuss a very important topic which is risk management when trading cryptocurrency and other assets. So even if you are very skilled in reading charts, you are most likely going to lose money if you don't know how to properly manage risks. And that's exactly what we're going to talk about in this episode. So before we get started, I want to remind our audience that this is an interactive show. So please write your question in the chat and we pick the most interesting ones and ask our guests. So anything that you can think about how to manage risk and in general on the topic, you can just write your question and we're going to reply. So also I want to remind our audience to click the like button and subscribe to our channel. Okay, cool. So let's get started. First of all, before we get into the subject of today, I would like to know your perspective on the latest movements in the crypto market. So, Charlie, what are the key levels and the indicators you're looking at at the moment?

Okay. Can I share my screen?

Of course.

Okay. Can you see that?

Okay. Okay.

Oh, yeah, There we go. Right. Okay, so I've just got the bitcoin futures up here. And so it's very much like when I was last over, I think I had this technical trend line here. It's a weekly chart of bitcoin. And we were talking when I was last here a month or six weeks ago, about this level. As we can see, just a couple of weeks ago, bitcoin has come up to that trend line. And technically it's been rejected so far. And so we're just really consolidating underneath it at the moment. So the next level that's of interest is really going to be to see whether bitcoin can break out and hold above that trend line. If it can, if it can get some closes above there Then we can start opening up the pathway, the doorway to these prior highs back from sort of June, July of last year. But having said that, and it always has to be a caveat that bitcoin has had a good run. Let's bring it down to the daily chart. It's had a good run off those March lows is consolidating here like I said for the last five, six weeks. And there's nothing to say that this couldn't want to start to come down and maybe take out some stops. If I bring up my pen here, there's bound to be an accumulation of stops starting to build in the market between these two lows here. So it's possible there's still another flush down at some point to take out some of those. But overall I'm fairly bullish on bitcoin. But certainly in the near term there'd be very easily be the case that it could want to do a bit more of a pullback just to take out the last pivots that have developed there in the price chart. So that's how I'm looking at it. Overall, bullish, but near term anything could happen. So longer term, yes, still looking to see for that trend line break. But in the near term, in the near term I think anything could happen and it could come down. But I'll talk about gold in a bit because I think there's some correlations going on there as well with gold. But for now I'll just shut up and hand this over to Naheem and see what he wants to say about it.

Yeah, that was very cool. Interesting. Yeah, we're going to talk about correlation with traditional assets in a second and yeah, Naeem, I would like to know your take on the current situation. What do you think? Can you give us.

Thanks Charlie for the explanation and I do concur with Charlie with the prospect. Look, I think when it comes to bitcoin or digital assets, and when it comes to digital assets, you're only looking at the top three coins to begin with. If you are a long term trader, you don't want it to pay attention to small movements unless of course you are thinking of adding into your position. Now if you are thinking of adding into your positions, the best opportunity perhaps we had this year was when the price really dropped below the 200 week moving average, not the 200 day. Because if you're a long term trader you, you really wanted to be focusing on a bigger chart, you really wanted to be focused on a bigger time frame and that was the Opportunity when really bitcoin touching around 3900. And now the fact is that on a weekly time frame, why don't I just quickly share my screen to show you guys that what exactly we are referring to. So just to let you know, this is the Bloomberg platform, so please do bear with all the things on that. So first of all, as always, if you've seen any of the videos, previous videos that we do on a daily basis, I always begin with a weekly time frame because this is where the bigger trends are and then this is where everything matters. The rest will just fall in place. So when we are looking at the weekly time frame, you are only looking at the price with respect to the major moving averages. Now obviously this is a weekly time frame, so you have three all the moving averages on this one. They are your weekly moving averages. So right now what I am really looking at is the battle of the price with a 50 week moving average which is in pink. Green is your 200, sorry 100 week moving average and yellow is your 200 week moving average. I believe that there are some really good odds in favor of price to break below its 50 week moving average and if that happened, that would be really good because we really want to break out of this nasty consolidation phase. The one that Charlie mentioned earlier that we're really consolidating between let's say 9,000 to 10,000. Sometimes we touch 10,000, then we come back. But we really wanted to come out of this range and we really want the price to come and retest this 100 week moving average and then see how the price really performs from here. Because if it stays above the 100 week moving average, the trend is still pretty good. But if it falls below the 100 week moving average then that you are really focusing at the 6,000 mark where your 200 week moving average is trading. I do not think that the price is really going to visit the COVID 19 low. Shall we just call this COVID 19 low? Because this is when really stock market crashed and then the crypto prices crashed at the same time as well. So I do not think, but let's just not rule out everything. But if the price, if the bitcoin price is really going to continue its journey, it needs to stay above its 50 week moving average. So that's just a sort of a short term view if I hope that kind of makes more sense for you guys from a bigger time frame perspective.

Great, thanks a lot Naeem. That was very insightful. I would like to remind our audience that if you have any questions regarding the latest movements in the bitcoin market or maybe want to know what is the most likely outlook for the next few days, weeks, just write down in the chat and ask and we're going to ask our guests about it. Also, I would like to know what you think are the most probable next key levels for bitcoin. So moving on to the next question, I would like to ask you about what happened in the last few days in the stock market. So we saw a pretty consistent drop in stocks a few days ago when there were overspread fears that a second wave of the COVID 19 pandemic could spark and bitcoin mirrored the stocks falling below the 9,000 benchmark. So that was another situation in which bitcoin has been showing correlation with the stock market. What do you think this correlation is going to continue in the long term and what should happen for this correlation to break for bitcoin and the stock market to decouple? What do you think, Charlie? I can't hear you. Maybe you are muted. Charlie, we can't really hear you.

Sorry, I had my mic muted whilst the name was talking. So I think, yeah, I'm going to look at a different correlation, if you don't mind, what you're saying about the stock market. Absolutely right. Bitcoin, yes, it fell on that day, but pretty much everything fell on that day, just late last week. But if we look at bitcoin here. Yeah, I mean it's consolidating over this last month. I actually quite like the correlation between bitcoin and gold lately in the way that gold has been in much more of a consolidation that we've sort of seen more of a consolidation in bitcoin like we're seeing in gold here, rather than. If I go to the S and P, you're talking about the stock markets. If I go to the S and P, wouldn't really say that's been in a. In a consolidation. And yet again, going back to bitcoin, we know that it's been generally in this consolidation. So I actually prefer to look at bitcoin at the moment and gold. Now, don't get me wrong, I'm not saying that if the S and P or the stock markets fall away that bitcoin won't go with it. A bit in sympathy and I think that could well happen. But what I'd be looking at is to see if we get a breakout in gold if that happens, going back to gold. Because I think looking at that consolidation, it wouldn't surprise me if gold breaks out that we see bitcoin break out as well. So that's what I'm keeping my eye on. If gold breaks out of its consolidation, will we see another asset like bitcoin which is highly traded by the retail trader out there, will we see bitcoin go up as well in line with gold? So that's going to be more interesting to me right now than than the S and P or the stock markets. But certainly at the moment, like I've already said, I think that the very short term picture for bitcoin, if I bring that back up again, I think the very short term picture for bitcoin is it is in a consolidation, it's been slowing down in this consolidation. And so therefore, yes, we could see a pullback. The stock markets have had an amazing run. We, we've got huge amounts of sentiment, positive sentiment and you could argue extreme sentiment in the stock markets at the moment. So maybe going back to the stock market, maybe the stock market does need to do a bit more of a pullback yet just last week, where are we now? Thursday or is it beginning of this week? It came down to my black moving averages, my 50 and it got really close to my 50 but didn't hit it. And one thing I look for when I'm looking for retraces is a market to actually come back and test a key moving average. Naeem was just Talking about the 2002 and the 1000s. I trade with moving averages most of the time and that was what I call an air kiss. So quite often when they air kiss they'll actually come back down at some point to then actually go and touch it. So I'd still quite like to see some sort of retest down there to that moving average. So maybe bitcoin has some soft, soft, a soft near future. But generally speaking I'm interested in seeing what gold does and seeing if bitcoin, if gold breaks out, maybe it doesn't, but it's very flat at the moment. But if gold can break out, then be interested to see if bitcoin can go.

Thank you, Charlie. Now I would like to know what Naim thinks about this issue regarding the correlation between bitcoin and the stock market and also maybe other traditional assets like you said, gold. What do you think Naim? Will we continue to see a correlation, a strong correlation between bitcoin and the stock market in the near future?

You know, makes me really gives me a different feeling when, when we really talk about the correlation between the stock market and bitcoin because that, yes, Apart from this COVID 19 stage, this pandemic stage. And that is just primarily because investors were setting out their assets, the traditional safety of an asset such as gold, because obviously they were trying to save their portfolios from margin calls. And some of these investors who were holding their positions in bitcoin, they also started to sell them because obviously they needed cash in order to prevent a margin call. So now all of a sudden, yes, there is this phenomena or this concept among investors or traders, shall we? That yes, there is a coalition, but the reality is the coalition doesn't really exist that much. Yes, there is a correlation between bitcoin and gold. And let me show you because while Charlie was speaking I was just drawing that correlation up for you guys. So if you guys can see my screen. So in, in blue, what do you have is you have a price of gold. So that's, that's what it is trading at right now today at 1724. And on, on the right hand side you have your price of bitcoin. So I'm just going to take out all the moving averages for you guys to just to have a better picture. So we have again gold on this side and bitcoin on here. And over here you have correlation between xbt, which is your bitcoin and gold. So you can really see that yes, that correlation does exist, but it has also started to flip fade as well to a larger extent as well. So you know, just to say that yeah, if, if gold will break, Bitcoin is also likely to break. Respectfully, I'm just a little bit wary of this particular, particular factor. And then the reason being when gold is going to break, that is primarily going to break on the back of fundamental factors such as if the Federal Reserve is going to push the interest rate in negative territory below zero or if they are going to really adopt the yield control curve in order to control the treasury. The treasury yield. Right. If they do anything of that, then yes, we are expecting a lot of weakness in the dollar and that weakness can really spare some safe haven assets. Then of course gold sits on top of that. I'm not saying that we won't see a move in bitcoin because obviously it is also against the dollar index as well. And if I pull out the Dixie which is your dollar index, just to show you the trend for the dollar index. There you go. So you could see that the Dixie which is right in front of you in white has been given up like it has been in the downtrend so let me again make that a little bit more clear for you guys so you can really see a little bit more clear. There we go. So this is your dollar index right in front of you. And what you can see from the chart is that obviously there has been an enormous amount of retracement with respect to the dollar index and that has fueled some sort of a rally for, for the, for the gold price because the only reason the gold price is above 1700 right now is. Well, not, this is not the only reason, but one of the reason is because of the weakness in the dollar index. And of course there are certain qualms with relation to, as you've mentioned earlier about the second wave which again I have, I have my concerns whether we do have a second wave or whether this first wave hasn't finished. But to, but to summarize, if there is any sort of a correlation between the stock and between the indices and of course the sorry, sorry indices and the bitcoin right now you can say just between this three month period. But apart from that, that doesn't really, there isn't a strong evidence of that, that yes, bitcoin moves in the same direction and that we can really justify that there is a coalition. Bitcoin is a very different beast and the entire momentum was pretty much fueled on this concept that okay, federal banks and the central banks and their policies will not work because the way that they're printing money, it is, it's, it's just insane. And hence the next currency which is in limited supply is Bitcoin. And don't get me wrong, I'm not going against Bitcoin because if you read any of my articles which are written on Forbes or anything, I'm known for being the, one of the biggest bull when it comes to bitcoin. But the recent price action on the back of what we have seen from the Fed and nothing, no reaction in the, in, in bitcoin. I mean right now what happened with respect to during the pandemic period and what the Fed has done, we shouldn't be sitting where we are right now. If the theory was right, Bitcoin should have been well above 20,000, 25 or even 30,000 if not 15,000. But we are still very much in a consolidation zone and struggling to break above the 10,000 mark.

Thanks Naeem. Yeah, I think also that this correlation is not very substantial. Probably it's just due to the temporary crisis we all find ourselves in. And as soon as this COVID 19 crisis will fade away also this apparent correlation will fade away.

And Giovanni, you know what I wanted to point out right there is if you look at the stock indices, look at Nasdaq, it already has made all time high, right? New record highs are in place. You look at S and P, it already digged itself out, dig down itself. The black hole, right? So we were back in positive territory for the year. For the s and P500 index it was only the Dow, which was still slightly below in negative territory for this year. But for the s and P500 index, the next target that we were very much focused on was the it was an all time high. But is that is the case for bitcoin price? No, we are not even. I mean we've only retraced 50% if 20,000 is an all time high.

I still think that with bitcoin though, it's like a cult, isn't it? And so the problem is, and I've said this before, I think at the beginning of the year when I came on here, until we flush out a lot of these weak hands out of the likes of some of these markets, it wouldn't surprise me if these markets continue to basically remain in an accumulation phase for maybe the next year or so until we've flushed out a load of weak hands. And then it will go when the majority, as you know, when the majority aren't looking and then it will creep its way up and then all of a sudden what happened there? Bitcoin's at 20,000 and I didn't even notice because I just threw in the towel 12 months ago because I got so bored with my bitcoin holdings and I decided to buy call options on the S and P instead with my Robinhood account. The market is, we know is driven by fundamentals, but massively driven by sentiment as well. And it wouldn't surprise me if we need. We've had a couple of flushes now and maybe that market needs to carry on sort of going sideways, chopping in a range. That's what I've been forecasting for the next year or so. And then we'll see a gradual break overall for the bigger run to retest those 20,000 highs. So I think that for anyone who's watching, stick with it. But it might still be a painful journey for a while because it's going to test you. Yeah.

And talking about painful journey, we have a question from Rene Montenegro who asks 9200 crucial to hold. If not it's abyss. It's actually more a prediction. I would like to know what's your opinion about this 9,200 crucial to hold or not. If not, it's abyss. Is this a crucial abyss?

No, sorry, with all respect, no, I don't think it's the abyss. Just because 9200, 9200 on my chart was. It was below that just a few days ago. So I mean again it depends on the individual and what his time frame is, his time horizon is. He might be looking at it on an hourly chart for all I know. But no, I could easily see bitcoin, like I said, challenging some of those lows back down in the eight thousands just for May just to take out some more stops potentially if we are going to see some weakness. What's been interesting lately is that like the S and P when it's called its jets, gold's come down. Euro dollar, Aussie dollar, they've all moved in the same way. It's a funny old market at the moment where everything seems to move either up or down together. You know, there was once upon a time one market would go up and another would go down. But. But yeah. So now I don't necessarily see, see that being the abyss. I'm bullish on bitcoin generally speaking. I just think at the moment it's got stuck in a bit of a choppy range for the last five to six weeks and maybe that continues. But if it pulls back down into the low eight thousands, I wouldn't be that bearish on it. Just see it as more chop really until the next run comes. But that next run, and the easiest way to try and catch the next run is to wait and wait for confirmed breakout rather than trying to make predictions really on the back of a pullback.

Thanks, Charlie. Well, I think that's if we see the bitcoin price falling below 9200, that means we don't need to panic too much.

Not as far as I'm concerned. I don't know what Nahim thinks, but no, I don't see anything particularly there.

What do you think?

I think I agree with him. I think below 9,000 is not, not a major issue as long as we don't go beyond. Okay, if, if you're speaking purely from a technical perspective, your 50 week is trading at 9,128. So if we break below that, we clearly know that, okay, the, the trend is going to reverse. But there's caveat to that because there is another critical level which I am really looking at and that was let me just maximize that and then see and that was formed on the 15th of June, the low of 15th of June, which is 8902. So if there is a false, let's say, signal, if the bitcoin price falls below the 50 week moving average, but it bounces, then it should bounce above the 15th of June's low, which is 8902. But if it breaks below the 8902, then we are really moving towards the next important level, which is 8141, which is where your 100 week moving average is trading.

Thanks, Naeem. I think that we can move on to the second part of our show, which is more related to practical advice about how to manage risk while trading and also while trading cryptocurrencies. So I would like to know, you are both coming from traditional trading backgrounds, so you trade traditional assets mainly. And so I would like to know if you notice any difference between managing risk in crypto markets and managing risk in traditional markets. What's your opinion, Charlie?

For me, it doesn't actually matter which market you're trading. You should adopt risk principles. The problem that I see, actually, I see it. I was going to say the problem I see in the retail market, retail trading market, is that people don't respect risk so they don't use things like stop losses. You hear people say that they use mental stops and I always find that funny because the amount of traders I've met over the years who have used mental stops to their own detriment. Because when a market comes down to the level that you've pre agreed that you would exit at and then all of a sudden you'll find all the reasons why you should just give it a little bit more room. And then as it nudges down against you some more then, and then you get stuck like a deer in the headlights. So it doesn't matter what the asset class is, you have to respect risk, you have to use stop losses and only risk a certain amount. So it doesn't really make any difference. And I must also say, it's not just retail traders. I literally had a retail trader contact me last week, had some money with a money manager who was trading Kiwi dollar on the short side as Kiwi dollar was shooting up Martingale in all of the way. This poor guy, the investor invested and within eight days was at negative 40% on his investment and so had to come out. And the money manager, he's a regulated money manager and, and had all the reasons why he got into that position that he got into fortunately, he refunded the investor the losses. But nevertheless you do see this sort of activity where people will take on massive risk at almost all costs in order to make a return. And so that's where it's because from a psychological perspective, people don't like losses and that's why they don't use stop losses because the very thing that's going to save them, they're trying to avoid taking a loss, having a stop loss in place and then that cutting you out of the market is seen to be a loser or being wrong. And investors, many traders and investors want to be seen to be right. So the best thing that an investor or trader can do is to accept they are only ever going to be right certain percentage of the time. You don't need to be right all the time. I remember going on, I was on a radio show, BBC radio show here with Naheem will know who she is. But Giovanni, I don't suppose she will do. But lady called Ann diamond on a BBC radio show a couple of years or so ago and I deliberately said in this interview, I can't remember we were talking about. And she was talking about oh, isn't trading gambling? And I said well no, not really. And I started talking, I said in fact, I'm wrong 50% of the time. And when you should have seen her jaw drop when I said I'm wrong 50% of the time. Because she went how can you make money? She obviously hasn't got a clue. Why would she know about risk to reward and things like that? But a lot of traders and investors can't handle being wrong 50% of the time. And yet some of the very best fund managers as we know make their billions being right maybe 30% of the time win rate is not important when it comes to people constantly think that they've got to be right a lot. Really it comes down to managing your risk per trade, having a stop loss, only risking a certain amount of the trading capital, your total capital you have and then looking at your risk to reward profile will see you through. So it doesn't matter what that risk reward is. We can talk about that in a minute. But those are the basics of good risk management.

Cool. So Charlie, you don't think that the fact that the crypto market is particularly volatile, it kind of implies that you should adopt a different kind of approach in terms of risk management.

Nope.

So if you're trading a market which has a daily range of let's say 100, whatever that range is or versus a market that has a daily range of 1,000. All you do is you position size differently. So if you were going to trade at one pound for every point in that market that had a range of 100, and then you're going to go and trade that huge market volatility that's trading at a range of 1,000, well, you would just be trading at 1/10 of that. You'd be trading at 10 pence, let's say. So you adjust your position sizing depending on whatever the market is. And if it's a higher volatility market, it's very easy to ascertain what volatility is. Look at your average range of any market and then you can then start to decide where to place your respective stop losses and such like. So really it comes down to position management and you adjust your positioning relative to the volatility of the market. The S and P is a great example. Prior to February, I can't remember off the top of my head, I haven't got the ranges up, but the ranges were whatever they were, and then they just exploded into these huge ranges. So if you carried on trying to trade with the same position size that you were trading at in January, then the way the market was going well into March, then, yeah, you'd get blown out of the water. But yeah, you have to position size. So it's the same with bitcoin. No matter what the volatility is of a market, if it's high volatility, you trade with smaller position sizes.

Aha. Clear. So before I ask Naeem what he thinks about it, I want to remind our audience to don't hesitate to ask questions about how to manage risk in crypto trading, but also in traditional assets. Just write down your question in the chat and we'll pick the most interesting ones and we'll ask Naeem and Charlie about it. Now, Naeem, I would like you to tell us what you think about Charlie's analysis. Do you also think there is basically no substantial difference in managing risk with crypto and with traditional markets?

Okay, so why there is a difference? That is the key question, right? Crypto or crypto market has been blamed for higher volatility, Right? Because bitcoin has been explosive and it can run up to 3,000 and 4,000 in a day. And that kind of really raised those narratives that, okay, you need to. This, this is, this is a beast of its own kind and, you know, you cannot perform a risk management. But that is not true. What I'm about to share in front of you something really intriguing. Now do you know what chart is this which is right in front of you? And then I'm speaking of this chart. I will, I'll just minimize this one. Take, take, take a guess, Giovanni. What, what chart is this? What, what price asset is it?

It's very hard to say.

Okay, so this is something that we all use in our daily lives. And I'm speaking of gold. Oh, sorry, oil. What it shows over here is which never ever happen in the history of oil trading when it went in negative territory, minus 40, that is what you can see on this one. Now, if you are speaking of, if you just speak generally about support and resistance levels, right, 16 to $17 for crude oil was a really good support because that was a level that we've never seen for the last three decades. So you have to go back all the way back to 30 years in order to see that. So once you will see a support and the price falling like a knife into that support zone or a support level, you will say that I'm not gonna put a stop loss because prices never ever reach this level in 30 years. But if you, if you don't, if you don't put stop levels, this is what really happens. The price has a tendency to go well beyond those levels. And as you can see, the price not only went beyond, you know, beyond 10, because the next level that everyone was talking about was 10, it went in fact in negative territory. Now, yes, the prices bounce back enormously. And then this brings those thoughts back that, oh God, if I haven't had a stop losses, I would have made my money back because now prices are back to 40. But the fact is, if you are trading on margin and you are facing with something like this, you will be squeezed out of the market. So that's why putting stop losses, even at critical levels is the most important thing. And sometimes you actually don't even get a chance to put a stop level because some people think that, okay, they have it in the mind, but when the price really starts to drop or to move in any particular direction, it moves so rapidly that you do not get a chance to do that. And before you know it, your stop loss is at least four to ten times more than what you've initially expected. Now if I open a high street retail shop, I know I need to pay the utility bill, I know that I need to pay the rents and all of that stuff. Now with respect to trading, your stop losses are exactly the same bills that you have to pay. And no one can be right unless you Got a crystal ball that you know, right? Even with the good backtrack testing, when you do backtesting, and I'm going to show you in a bit on a Bloomberg something that I've just done it now for you for, for your viewers. With respect to bitcoin, even with the good back testing, you can still not be hundred percent sure because history doesn't repeat. It has a tendency to repeat, but there's no guarantee that it will repeat. But what can help you to become a successful and profitable trader is that you keep your stops, all the stops, all your losses to a very small ratio in comparison to your winning ratio. So your winning trades should be at least three or four times in much bigger magnitude than your losses that you are occurring. So again, if your winning trade should be making at least five or six times more than your losing trade, that is what I'm really interesting over here. So what I'm about to share with you something really, really interesting. So I've just done a backtest by using Bloomberg Terminal and this is very, very powerful. What I'm going to show you guys right over here is so this is bitcoin's price and I have used a certain weighted moving average. Now of course, if you want to know the number of this particular weighted moving average, you'll have to tweet and then I will give it to you for sure. But what we have done is we have done the back test of bitcoin starting from June last year, sorry, June 2019. Right. Which is last year until today. So there is an on a test portfolio with 100 million in that what we have is that on the long side, and the long side happens when the price crosses above the moving average, then you open the trade and then you close the trade and open a short trade the moment that the price crosses below the moving average. So all these red signs which you are seeing right now, these are your short trades and these are your long trades. So what we're seeing from here is that altogether over a period of one year, we had 14 total trades. Seven on the long side, seven on the short side. But look, the number of winning trades on the long side are only two out of five and then five losing trades and then three winning and four losing trade. But look at the total P and L percentage on the long side. 33% up on the long side and 15% up on the short side, making a grand total of 48% for the portfolio over a period of one year. Now what's the actual source over here, the actual ingredient which you really need to pay attention to is your average win and average loss. Look over here, your average win is in this circumstances, in this particular case is 24 million on the long side. That is what you're making on the long side. And your average loss on a long side is 3.12 million. Similarly on the short side, you are making 11 million on the winning side and only 4 million you are losing on the short side. So that is the importance of having the risk parameters in place.

Can I just. The only thing with that is that's a one year period. As nay knows that any backtest and you have pre framed that is only as good as the history that it was over. And Long Term Capital Management proved that with their amazing strategies that they use and then they collapsed in 1998. My only caveat to add to that is, well, how does that work? That's over a one year period. Any one year period, you know, could be good. Is it robust over, you know, a much longer period?

So I can, I can, I can certainly use any period that I want to. Right. So one year period with respect to Bitcoin is pretty good because the volatility changes enormously for that and you cannot really pre. The price doesn't stay the same. But now at least you know that this particular weighting moving average has a track record of performing this and it is likely to do that. But if you want, you can do, I mean especially if you're on a longer term time frame, on a daily, daily time frame. I can run this for over the last five years and then I can give the results that, okay, for the period of the last five years, these are the results. Now I have all the odds stacked in my favor. If the price cross above this particular magic moving average or weighted moving average, under this particular scenario, I am likely to win all. What I have to do is make sure that my risk parameters are in control. My strategy, the one that I'm implementing is.

Thanks Naeem, that was very insightful. I want actually to go a little bit deeper into this risk reward ratio topic. So most market strategies often consider the ideal risk reward ratio to be one to three, which means three units of expected return for every single unit of additional risk. So do you agree with this kind of golden rule or there are some exceptions to it? What? Can you comment on it, Charlie?

No, I don't believe that's a golden rule as such. I've seen plenty of traders get destroyed trying to use a 1 to 3 risk to reward ratio because if the strategy you still need to have that coupled with something that actually works. So I don't think it's a cut and dry thing and fun enough. In my trading room just today we had some visitors come in and one of the visitors mentioned that he looks for a one to three and couldn't figure out why he was losing money. So there's more than just risk to reward that comes into it. And so yes, you need to have a robustness of a strategy which is both back tested and forward tested. And even then the future is always changing. I've traded, like I said, since the late 90s and I've traded through the end of the bull market in the late 90s, probably fairly badly. But then I traded the bear Market from 2000, I've traded through all of that and obviously the financial crisis and stuff. And every time I've traded through any of these markets I've had to adapt. You can't always use what in the financial crisis, what I was using in the bear Market of 2000, 2002, 3, the same techniques then that I was using then. So you have to be able to be able to adapt. So coming back to your question though, one to three, I mean it's a lovely goal to have that. But again, coming back to back testing, I have strategies which are back tested and they use a dynamic exit. Actually the most optimum exit is actually what I call a dynamic exit. It's not based on a random one to three or something like that. So it's using, taking information in real time of what's going on. And so sometimes it might be a 1 to 5 exit and another time it might be a 1 to 1.5 exit. It depends. So in my experience I don't think that trading can be that rigid. I think that there's a lot of the markets are always changing and constantly evolving. And so for that reason we have to, but we still have to have strategies. So we have to have strategies and we have to back test them. And I do the same, but I found that rigid exits, that's fine, but I've just found more profitable ways than saying right, a 1 to 3 or a 1 to 4 or 1 to 2 risk reward. I found that for some of my strategies that the most profitable ways of exiting are actually using dynamic exits.

Okay, so a much more flexible approach. Naeem, what do you think about this risk reward ratio 1 to 3? You also think that this is not a golden rule. And also I'm curious to know how is this risk reward ratio related to the winning ratio that you, that you have? I think that these two parameters are kind of are strictly related to each other. Am I correct, Naim?

The only correlation that exists between the two is like for instance. Let me explain it this way. You can have higher losing ratio and you can still be a winner. And I've shown you the evidence of that, right? But the, the key factor over here is your winning trades. The size of the winning trades, the reward should be larger than what you are risking for. Otherwise you need to be right more than you are, than you can be wrong. And that's, that's just simple as that. Otherwise maths won't work in your favor. That's number one. Number two, depends on your trading style. If you're a day trader, one to one can work, but only again you need to make sure all the odds are stacked in your favor. That means you need to be winning more of the time, otherwise you will start losing your capital. If you are passive trader or a swing trader, then 3 to 1, forget about 3 to 1. You may be wanting to target 71. And I'll give you an example of that. Look at the airline sector, look at the risk to reward ratio in the airline sector right now. Incredibly beautiful. It is, it's just literally crying out for investors to look for that sort of a ratio where you have more than 71. You can go for AA, American Airline, United Airline, Delta, even EasyJet, Ryanair. Now it's only 25% margin left before it digs itself out of a black hole again. That black hole means back in the positive territory for this particular year. Now again, this goes back to position sizing and I'm going to speak of my own position portfolio. What I did during this pandemic crisis, when this particular crisis happened back in March, we started to really look at the sell off, the magnitude of that sell off, and started to compare it what happened back in 2008 and 2009. So I was very happy to deploy more than 80% of my total capital back into the market. If the market retraces more than 50%, meaning if the S&P 500 drops or erodes 50% of its value. But we never received that level. We never, never had that sort of a sell off. Okay, so we had nearly between 30 to 33% that allowed me to deploy only 45% of my capital out of my 100%. So again, this is a position sizing rule. So I've reduced the position sizing, but I'm still reaching for that particular higher level of risk to reward ratio at the same time now I cannot wait for another 10 years for a similar pandemic to happen in the market and then deploy the capital because believe me, I was waiting for this kind of sell off for a long period of time where we could really see a sell off like that. And when it happened, yes, we went in those sectors where we saw the most amount of opportunity and those sectors were your airline sector, your cruise lines and similar, similar verticals in that I could not deploy capital in, in tech sector. Why? Because there was no discount there. I couldn't see 5 to 1 risk to reward ratio despite the fact that Tesla is up over I believe 900%. Let me just check that out for you. One second, give me one second. I can give you the exact percentage of that. Come on. Okay. All right. So Tesla is up by. Yes, 138. Sorry, 138 year to date the stock price was trading in around 4, 4 to 500. But it didn't allow me to put my capital in stocks like Amazon despite the fact was it had an amazing rally or in Tesla, or in Apple, or in Facebook, even Zoom. Why? Because I couldn't see that the risk to reward ratio was there. I did deploy capital in Zoom because that was a special situation where those stocks were going to go higher. But stocks like Tesla and Apple, there was no discount. So we went after those stocks where we had a bigger margin of risk to reward ratio. Now yes, we are back in track because remember Norwegian cruise line, we bought it in around, I bought it in around $11, it went well over $22 and right now if you look at it, it is back below that. It is trading at 19. But I was up over 100% in that position and still there's a huge margin left. So that your risk to reward ratio is really depend on the sectors that you go after. And I highly recommend, I would say that go for a bigger risk to reward ratio in those sectors where you can see that yes, there's a huge margin to the upside rather than to the downside.

Well, thanks Naeem for sharing your experience. I want to remind our audience that if you have any curiosities about how to manage risk while trading risk, reward ratio, stop losses, all these nuances you can ask in chat and we're going to ask our guests about it. So I wanted to move on talking about the amount of capital you should invest that you should put into a single trade. So a pretty Common way to limit losses, as usually is recommended, is never putting more than 1% of your trading account into one single trade. Do you personally adopt this rule or you also think it's something that it's too strict?

Charlie I think, and I'm pitching this at your viewers who are individual traders, so I appreciate names talking from a fund perspective there just a minute ago, but most of our the people who are watching this are probably trading individual assets at a time. And so individual traders most of the time will be in positions of maybe up to a few, maybe up to 10 maximum. Probably not even that. When you think of the amount of people who are trading out there who are trading in Europe who come under ESMA regulations on margin accounts because most people are trading CFDs and the likes, so they can't actually hold huge numbers of positions because their margin requirements limit them from doing that. But as far as risking a certain amount of capital, absolutely. I always recommend to an individual trader and this is different to fund trading by the way, because on my fund I trade way less than 1% at risk, as you've just mentioned. But I think for an individual trader, trading at 1% risk is absolutely bang on the money, so to speak. However, it does come down to their own psychology as well. Lots of individual traders can't handle trading even 1% at risk. So if they're more of a fear based trader, 1% is too painful for them. They then find themselves still wanting to take their profits too soon and do those sorts of things because it's just too much and so it does come back down. Whereas another trader, 1% feels too small for them and they want to be risking 2, 3, 4, 5%, which is 5% too much. I mean, I've risked 5% when I've done my speculative trading challenges. When I did my 10k to 100k challenge and the 50k to 500, I would risk up to 5,5% per trade. But always with a caveat on that, that's highly speculative trading. And I was doing those challenges for a reason. Just to show people what can be done with a lot of leverage. But it's dangerous. I don't recommend doing that to anyone. So I recommend 1% to our traders. But even that, like I said, some of our traders, they're trading at half a percent risk. These are individual retail traders. So I think it's a great general figure, 1% of total capital to risk per trade. But it has to be right. If it feels like you're still, you put that position on and then you're feeling fear towards that position, you're trading too high, drop it down, halve it, whatever it might be, it might be 0.3 of 1%. I don't know. You will find a level for yourself which you're comfortable with because if you find yourself that you're laying in bed at night worrying about a position, the position's too big. And also I guess there then gets a bit more technical depending on how many positions someone's in at a time. So if you're risking 1% per trade, but you're holding five open positions, do you want that? Are they correlated? So then it gets really technical because there's no point being long Euro dollar, cable Aussie dollar, you're at risk because you're trading everything against dollar. So there are other factors that come at play. If you're holding a few different positions and that's when you are more likely to drop the risk again because you wouldn't want to be at 1% risk across five highly correlated asset classes. So there's a bit more to it than that. But certainly for retail traders, I think that's a great rule of thumb to base it somewhere around there and then drop it lower if you feel that 1% is too much.

Thanks, Charlie. Naim. What can you comment on this 1% rule? Do you agree with Charlie?

It allows you to live for another day. That's what it is. So you can live for longer by applying that 1% rigid rule for in. But I think when investors are looking at risk, first of all they should be looking at their own risk parameters. The most important, what they are comfortable with. And secondly, they should be digging into the opportunities. Where do you, where do they see the higher reward and then more odds in their favor. If that can. If everything stacks up, then obviously you want to risk big over there, but not that big. I think that any particular sector can only maximum have a 15% of allocation. And I'm speaking of one full sector in your portfolio, right. That includes your entire airline or tourist sector or your energy sector. I think it would be suicidal if you start increasing more than 15% each sector. Now within that you can allocate more capital to each position depending where the momentum is. If the momentum is in your favor, then certainly you can perhaps put a slightly bigger position there because then you will have. Obviously, you know, when you're risking it like that, you'll have a higher reward at the time. Same. Same time as well. That's pretty much it. But again, I think it boils down to each and every single investor. And for retail traders who really trade one particular position, and especially when they're trading on leverage, I think 5% is way too much for anyone to begin with. If you want to do that, that would be classified as betting. You might as well just start, you know, buying the lottery ticket. Well again, the odds would be very bad for that for sure. It's, it's, it's, it's just too much. Like for instance, if I want, if you wanted to buy oil when it was trading at 3 or $4, you could have put more capital on it. We had, we had interesting conversations with people who were saying shall we, to this insane extent that, shall we put like take some of our savings, most of our savings and put into that, no, we don't know if oil prices have gone down to this level, like 3, $4. We don't even know. I think the sentiment was so strong at the moment and it was highly likely for the prices to go in negative territory. They did go in negative parity, but now that move accumulates to $80. Move from minus 40 to plus 40. That's what it is.

So the average retail trader wouldn't have been able to get in at minus 40 anyway. No one, no one, no one would.

Have been able to get at minus 40. It's only, and only those people who actually contain or who have facilities to store their own oil because the oil, the only reason the sell off really happened was because there's no storage place and there were very few and handful firms who were actually able to buy and store their own oil at negative prices. But regardless, when the price came back in positive territory, you are still looking at a huge, huge gain. Can you bet a certain amount? Whether that's one hundred pound or a thousand or a hundred thousand or one million. If you think that capital isn't really going to make any difference on your living, sure, go ahead, risk that on that particular trade.

I just need to add this in again for retail traders. Even when oil was back up and the contracts changed, they couldn't get in even when it was positive. A lot of brokers weren't allowing them to get in, they weren't offering it.

You could have bought futures contract.

Yeah, but the average retail trader doesn't trade futures contracts. They're trading CFDs, they're spread betting. They're, you know, so what we're talking about is what the average retail trader out there, that's what most of the viewers who are watching this and most of the viewers, their, their brokers trading with whoever they might be trading with just wouldn't have been out offering the them the ability. I know this because I deal with retail traders all the time and they were moaning because their broker was not allowing them in.

I think there was a, there was a way around that. The way around that was obviously to buy forward contracts on the CFDs. Because I know that even at Avatrade we offer forward contracts all the way to December. You can buy them.

Yes. Yeah, but of course, and now if.

You see the gains on those contracts, the price is merging.

They were buying. Yeah, but for, at that point they wanted to buy the near term contract. Of course they wanted to buy Spot and they weren't getting what they wanted. That's the difference. But these are semantics because we're in agreement. But you know, it's the same. You know, I'm just saying that for a lot of people out there, they, you've got to bear in mind that there's a lot of, a lot of retail traders, and I don't want to use this word in a nasty way, but they're unsophisticated in that they don't necessarily understand the markets and the depth of the market in the same way as sophisticated traders will do. It's not to say that they're not at it. They're not being trading for a year or two years. But a trader who's been trading for a year or so and many average traders will be in that bracket, they wouldn't necessarily know how to have navigated that market. And like a lot of these things.

You know, I think at Avatrade we provide enough resources and training, but at Avatrade we provide every single day more than sufficient resources.

And okay, so what are average trades? Average? What's the, you know, everyone has to declare now the brokers have to declare how, what percentage of clients are losing. Yours will still be similar to most other brokers.

That loss is primary. You have to understand why that loss is and why that term all of a sudden the Robinhood, it has become very popular and that is because of lack of discipline among them. You have to impose the only difference, I think this narrative of calling retail trades or Robin Hooders, it is so wrong to say it to retail investors because there is an argument in the market right now that the market is driven pretty much by retail investors. And they do because they don't know what they are doing. But I think it is completely, completely wrong if the market is completely driven by retail Traders, well, they have made sufficient money because look where the S and P is trading right now. Look where the NASDAQ is trading right now. In that case, smart money is still parked on the sideline while these guys have bagged quite a lot of.

Yeah, but you, you and I know that, that traditionally read the, the that what you're talking about there. If we've got a load of new participants in the market as a result of furlough people in lockdown around the year around the world and then open up brokerage accounts because they can't, they can't bet on the horses anymore or on sports betting or whatever it might be. I know what I'll do. I'll trade the markets. I totally get that. And yes, they've done well, but statistics, the odds are not on their side until they become more sophisticated and they understand discipline and all of that sort of stuff. I've never, I've yet to meet a trade a retail trader who makes a load of money in their first six months, who doesn't give it all back afterwards.

We do, we do certainly have them. We certainly have them in our portfolios of clients for sure. I think the key.

Sorry to interrupt you guys. I just want to bring the conversation to the, to the main point because I think we are running out of time a bit. But I want to ask you a question from the audience. The summer's project Ask are trading bots worth looking at if you don't want to trade? Charlie, what do you think?

No next. Trading bots again? I mean again, there are, there are automated systems and there are automated systems you can go to and pick a trading bot from certain types of brokerages out there that you know, social trading brokerages and you can pick a bot off the shelf or whatever. But, and there's those sorts of things are marketed online and most of them are not worth investing into at all. Then you can go up the ladder and find some more sophisticated sources. Then yes, there's. Most of the big banks use automated trading within their internals and the day of the prop trade or a lot of these banks have long since gone as automation took over. But again, what we're talking about is retail traders are trading bots worth buying off the shelf in my view. In my experience, I'd say no. There's always going to be exceptions to the rule. But it's funny, I've just come across so many traders who've been burnt by all these sorts of things and these things seem to have amazing track records. Incredible Charts where they just have this wonderful equity graph that just goes from left to right and it all looks amazing. Then they funny enough invest their money in it and then it just starts going down. So that tends to be the regular story that I hear. So I would say learn to do it yourself rather than invest in a bot or just put it with a professional money manager who has got a good track record rather than a bot.

Or better watch our videos and you get to learn yourself. So I want to move on to the last question of the show. So I want to talk about diversification. So diversification is another important component of traders risk management strategies because you need to be able to put your money into different kind of assets that behave in a different way in order to balance your potential losses and gains. So can you give us a brief overview on how you use diversification naeem?

So an easy way of doing that in terms of a stock says that if you are long, you buy a put option on that. Right? So that's just a simple way or another diversification is when volatility is really selling so cheap. Like how it was before the pandemic, which used to be I remember at 10 and 11 and now still it is trading at 33 and 34. So if that, that is sort of a diversification, hedging, I would say not even a diversification, that is more of a hedging strategy that you will use for your portfolio. With respect to the pure diversification, I think look for portfolio, look for those derivatives for those stocks which are not correlated. For instance, if you are, if you are trading a currency euro dollar and sterling dollar, there is no really diversification there unless you have a cross which is euro and sterling, because then you really have a battle between two different central banks and two different monetary policies altogether. And that can yield a very different outcome for you. But if the denominator is common between the two currencies, you are likely to lose the battle.

What about bitcoin? If you are holding Bitcoin, what would be a good way to diversify your bitcoin holdings while trading right now in this moment of time?

Gold.

But you were discussing before that gold is showing a like a correlation with Bitcoin. That means that if gold is going up, Bitcoin is also likely to go up. That doesn't sound like a fair diversification.

It's a diversification of assets because they both at least used to be classified. At least Bitcoin used to be classified as a safe haven asset. If two assets are classified As a safe haven assets. But one of them is not a typical safe. Have an asset as gold has served over the last few decades and so then you can certainly do that. But if you are speaking completely different, then I personally can speak of my own portfolio. I hold Ethereum, I hold Bitcoin, both of them in my portfolio. I don't hold anything else.

Charlie, what do you think about the best way to diversify your portfolio in order to manage risk?

I think yeah. I mean again, you're talking about portfolios. There's so many different arguments we've got here this evening because we've got the non leveraged portfolio argument which from a fund manager like Naheem is talking about sometimes when he's talking about investing into sector groups and the likes. And then you've got an individual trader who has maybe a shorter term time horizon or is holding like many of your viewers will be holding, like Nahim just said, bitcoin or some other cryptos. So if you've got someone who is holding something like Bitcoin and they're holding it properly in a wallet and they've properly invested into it, then one of the easiest ways would be to then open a CFD trading account and short it as a diversification as a hedge, so to speak. If you're looking for diversification, it's a hedge. So you could employ a policy like that just to like traditionally funds will do when they're long an asset. Maybe in one class, they'll short it in another or a different timeline. So that is one way that someone could diversify if they feel that they're all My word. I might be a bit exposed to Bitcoin on the long side because I've bought loads of it. Well, they could have some very small CFD type positions or whatever, futures positions, whatever to offset the volatility in their portfolio.

Awesome.

Naeem, do you agree with Charlie?

Yeah, no, I think he's on the spot with that.

Okay, cool. So I think this is a great time to wrap up things. Thank you Charlie and Naeem, that was a very cool insight on risk management. I hope that people got something useful out of it. I'm sure, I'm sure it was like that. So thank you for being with us.

Thank you for having us. Thanks for having me.

Absolutely. And thanks for the banter here tonight as well. I just thought, well, might as well make it a little bit of a head to head, so to speak in some of the subjects that we were covering. So it was really good.

Yeah. So. The nuances of derivative trading versus Spot trading. I strongly recommend you to check out our Q and A session that we did yesterday with Jack Tao, CEO at crypto exchange Phmex. You can find the link to the video in the description below. Also, I want to remind our audience to press the like button and subscribe to our channel. I'm Giovanni, your host, and yeah, see you next time.