A trade and trading signal is a trigger for the action, either to buy or sell a security or other asset, generated by analysis. That analysis can be human-generated using technical analysis or indicators, it can be generated using mathematical algorithms based on market Price Action, possibly in combination with other market factors such as economic indicators. These signals can either be for traditional assets such as stocks or commodities or for relatively newer digital assets such as cryptocurrency. Furthermore, you can learn more about them from our article on what are crypto trading signals?
Table of Contents
How does a Trading Signal Work?
Trading signals can use a variety of inputs from several disciplines. Typically, technical analysis is a major component, but fundamental analysis and economics may also be inputs, the goal is to give investors and traders a mechanical method, devoid of emotion, to buy or sell a security or other asset.
The following example will make you understand that how to read out the trading signal!
#MIRUSDT ENTRY - 3.465-3.15-2.88 take profits - 3.6- 3.78 - 4.32 - 5.4 - 7.2 Stop-loss - 2.7
The coin name is MIR/ USDT, with this example it contains ENTRY, SHORT TERM TARGETS, LONG TERM TARGETS, AND STOPLOSS!
What is ENTRY?
An ENTRY Point is that where a person needs to accumulate his/her buying between these zones from 2.88 to 3.465
What are take profit targets?
A Take Profit (TP) is an instruction to close a trade at a specific rate if the market rises, to ensure your profit is realized and goes to your available balance. Take Profit is optional and you can set it once your trade is already open. Furthermore, you can go back and adjust the Take Profit at any time while the trade is open. The example contains the TP as – 3.6- 3.78 – 4.32 – 5.4 – 7.2
What is stop loss or stop limit?
Stop-loss can be defined as an advance order to sell an asset when it reaches a particular price point. It is used to limit loss or gain in a trade. The concept can be used for short-term as well as long-term trading. This is an automatic order that an investor places with the broker/agent by paying a certain amount of brokerage. Stop-loss is also known as ‘stop order’ or ‘stop-market order’. By placing a stop-loss order, the exchange platform will automatically sell out your assets at the stop-loss price you have given in example it is 2.7$
Also, read What is Risk/ Reward and Money Management?
Let’s Move to the Position Sizing!!
What is Position Sizing?
The majority of your take trades with your complete portfolio – Which is wrong!!!
It is very highly advised to take the trades with the proper position sizing because 1 simple mistake can turn your portfolio in zero or loss.
Before heading away let me clear one misconception about position sizing that POSITION SIZE AND RISK AMOUNT ARE NOT THE SAME!
(if your trade capital is 1000$ and you are risking the 1% per trade, it means If your stop loss gets triggered, your losses will be limited to 10$( 1000*1%=10$) You will lose 10$ if your Stop loss is triggered. It does not mean that your position size is 10$.)
For example, if you have a $2000 Portfolio you should invest only a part of it, not go all $2000 in a single trade. Don’t Put All Your Eggs In One Basket. You have to manage your Risk Properly and for Position, Sizing Keep some key points in mind…
You can go with either 1% or 2% risk of the total portfolio. Here we will go with 2% (In this case 2% of 2000$ is 40$).This means if the stop loss hit you will only lose 2% of your Capital/ Portfolio which is 40$.
Let’s take the above example I have given you in the TRADE SIGNAL section.
Before we move forward here are some position size calculations essentials!
- Risk Amount
- Entry Price
- Stop loss
Now let’s suppose I have $2000 and the risk I want to take is 2%, Take a look at the Trading signal I have given above and notice the ENTRY POINT, TARGETS, and STOPLOSS value,
So, I want to invest in MIR but the thought is crossing my mind: how much I should invest so I don’t lose 10%, 20%, 50%, or even 100% of my capital!
Without wasting my time I will apply the formula to it. For example, I would like to take an entry at 3.15, before putting my money into it I will calculate the investment amount and risk value which I can lose if the stop loss is triggered!
Formula: (Capital x Risk/Stop Loss)
My Capital size is = 2000$ Risking per Trade is = 2% Entry Price = 3.15$ Stop-loss = 2.7 (14.31%) < Difference of 3.15$ to 2.7$ Now Using Formula: Capital*Risk/Stop loss 2000*2/14.31 = 280$ Position Size (Amount will be invested)
Steps to use the Formula
- Just go to the TradingView website.
- Thereafter, select the MIR/ USDT chart and select the exchange where you trade.
- Select the long position tool from the tool section and apply it onto the chart.
- Then go to the long position tool setting and set the account size as per your capital and change the risk percent you want to take (I’d suggest 2 to 3% No more than that).
- Finally, set your Entry price and Stop loss Price.
LONG POSITION WILL SHOW YOU THE QUANTITY, FOR MIR QTY 88.692 Multiply with the entry price (3.15) 88.692 * 3.15 = 280 (Amount will be invested)
Now let’s see the profit and loss!
Amount we invested 280/3.15 = QTY * 88.89 (Multiply this QTY with the TP price, 88.89 x 3.6 = 320$) The profit I gained 320-280 = $40
Whereas, If you see the stop-loss price got triggered which is 2.7 so
(Multiply the QTY with 2.7, 88.89 x 2.7 = 240) The amount I lose 240-280 = -$40
NOTE: Always Do position sizing and risk management. Before taking any Trade For the Sake of Your Safety. The market is Big Brothers and Sisters Don’t Play in it With your Emotions. They Don’t Care about it…You can Handle Your Risk and Position Sizing…Make yourself Strong in that.