6 Rules To Manage Risks While Trading Crypto
The crypto market is one of the most volatile, with a high potential for losses. In fact, after the peak of November 2021, it has been all downhill from there for crypto investors.
That doesn't mean the end for crypto trading. Instead, it means investors exercising all the caution they can master when trading crypto. While you can't always avoid making losses in crypto, a solid risk management strategy can help minimize the risks.
If you always want to avoid losses, your risk management strategies must be flawless. Fortunately, there are rules you can adhere to and manage your risks well enough.
Let's delve into the rules to use in your crypto risk management strategy.
Have a Sound trading strategy
It doesn't matter how skilled you are; you still need a sound trading strategy. This is one rule you can't afford to break if you are to manage your risks.
A trading strategy is vital for any trader worth their salt. Not only will it allow you to build consistency in your trades, but it will also help you on your way to profitability.
A sound trading plan will help you in the following ways:
- It will prevent panic trading after inevitable losses
- You will lose less as you'll stick to your plan
- The plan will have a sound exit strategy to avoid further losses
- Scaling to profitability will be easier
Therefore, it is in your best interest to develop a good trading plan and stick to it. That way, you'll manage your risks better and not find yourself in too deep.
Conversely, without a plan, you're more susceptible to emotional trading that's rife with losses. A good strategy will help you avoid that.
Diversify Your Trades
Ever heard of the saying, don't put all your eggs in one basket? Mark Twain and Warren Buffet have spoken out against spreading risks. Buffet thinks it's an ignorant trader's prerogative to spread risks.
The vicious crypto market begs to disagree. Building your portfolio on only one crypto coin is a grave mistake. Such is the volatility of the crypto market. Diversifying your portfolio ensures you can bear losses from a particular cryptocurrency.
Individual coins usually Have varying risk levels. A wise trader will do their research on the coins that reflect their risk appetite. Before researching how to buy ETH with a credit card, understand ETH's risk.
Therefore, spreading your investment around each of them cushions you if one of them tanks. It won't make you bulletproof, but you'll have something to fall back on when it goes downhill.
It also reduces the chances of everything coming tumbling down.
Proper capital allocation
One common saying is to only trade with an amount you can afford to lose. It might sound like a cliché only a beginner trader will pay attention to. However, even for experienced crypto traders, proper capital allocation is one rule you can't ignore in risk management.
Proper capital allocation will boost sustainability, especially if you're new to the game. That's because you'll know when to curb your investment excesses.
What is proper capital allocation, though? Properly allocating your investment capital means giving only an amount you would be okay with losing.
Take the example you have a total capital of $5000. Only invest some of that money since you have a more significant risk of losing everything. So, what do you do?
You settle on a value you can afford to lose -for most traders, that could be between 1 to 5% of the total capital.
If you lose it all, you still have a chance to make another trade that could help you break even. Investing in it all will leave you with nothing.
Chase prospects with good risk: reward ratio
Even if you're new to crypto trading, you know it is fraught with risks. You can't escape the risks, so the next best thing is to choose trades with a good risk-reward ratio. Also, the greater the risk, the more immense the reward, right?
So how do you determine the risk-reward ratio? By taking a calculating approach, literally. Use the formula below to determine a trade's risk-reward ratio before trading.
(Target — Entry) divided by (Entry — Stop Loss)
You won't have to manually use the formula and find the risk-reward ratio. Trading View has tools that will help you calculate that for you.
Once you've found the prospect with a good risk-reward ratio, you'll be ready to move in.
Never ignore stop loss orders
A Stop loss order is a tool that automatically liquidates your assets once the market price hits a specified benchmark. By doing that, a stop-loss order limits the maximum loss trader suffers. You cut your losses with a stop-loss order and live to fight another day.
However, you need to understand the different stop-loss orders and how they work to use them effectively. There are three types:
- Full Stop Loss Order
This stop-loss order will work best if trading in a stable market that experiences sudden price changes. Whenever you trigger it, it liquidates all your crypto assets preventing a trader from making too many losses.
- Partial Stop Loss Order
This order only liquidates a number of crypto assets a trader specifies. This order is perfect for most crypto markets since they're usually highly volatile.
- Trailing Stop Loss Order
Unlike the other two stop loss orders, the trailing adjusts depending on the price fluctuations of your crypto assets.
It is up to you to know when to use the orders but never ignore them. They are critical to any sound trading strategy and a fundamental rule to remember in risk management.
Be realistic in your trading
Experience matters little when trading crypto. Sure, you'll have some knowledge unavailable to most novice traders. But then it could make you overconfident and cost you all your profits.
That's why most traders with modest expectations don't make that many losses. There's a thin line between being grounded and expecting too much.
For instance, there's no way you'd expect to make over 50% profit on your investment if you didn't put in some unrealistic risk-taking. That would mean using too much of your leverage and even overtrading.
Such unrealistic goals will also lead to massive losses and could wipe out your capital. Remember, there's always the risk of going wrong, which is why you need to have a realistic trading goal.
Realistic goals guard against your greed and any unforeseen mistakes that are inevitable. Greed is, unfortunately, the scourge of many crypto traders.
Why is crypto risk management important?
Even with the best data discovery products, you can't fully control the risks of crypto trading. With that in mind, the most critical reason crypto risk management is essential is to prevent making massive losses.
The crypto market is ruthless, so you must know how to manage risks while trading. A solid crypto risk management plan will help you minimize the mistakes that could lead to the depletion of your crypto wallet.
Cryptocurrency is the future, and you should start trading! The golden rule is to invest only what you are willing to lose because you can lose everything. It's all about having fun, learning, and making money along the way.
Crypto risk averse
There you have the rules that should guide your crypto risk management strategy. Following the rules to the latter won't stop you from making the occasional losses. But it will help you avoid wiping out your entire capital or leverage.
Crypto trading is risky in that you take on risk for a chance of earning greater returns. Although there are many conflicting opinions about how best to manage risk in crypto, the key is to stay vigilant, open-minded, and prudent.
While we may not be able to predict the future of crypto, it is advisable to keep an eye on the markets and track your assets daily. This way, you can quickly adjust your strategy based on what's happening around you.
- What kind of risks should I expect while crypto trading?
The main risk to expect with crypto trading is constant dramatic fluctuations in the value of a cryptocurrency. An investment worth thousands of dollars could lose value overnight, with little guarantee that it'll rise again.
That's why crypto trading demands proper risk management strategies.
- Can you trade in crypto without losing?
It is impossible to trade in crypto without making any losses. Trading cryptocurrency is like investing in other assets, so be ready for losses. Even experienced cryptocurrency traders make losses. It is the level of losses one makes that matters.
- Is cryptocurrency worth the hype?
With a solid plan and proper discipline, cryptocurrency can work for you. However, you must be ready to make a few losses as you learn the ropes.
Cryptocurrency trading saw tremendous upward momentum in 2021, and some investors have hit it big.
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