Learn How Risk Management Can Help When Crypto Trading

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How Risk Management Can Help When Crypto
How Risk Management Can Help When Crypto

The cryptocurrency revolution is in full swing as global adoption increases. Today, trading cryptocurrency is no longer just for a handful of genius investors worldwide. Instead, many see the rise of DeFi and the growing popularity of cryptocurrencies as a unique opportunity for almost anyone with an internet connection to earn decent returns.

Because you can earn decent returns quickly and easily, some might argue that investing in cryptocurrencies is more attractive than investing in gold. However, unlike gold, these digital assets are highly volatile. The probability of default is therefore much higher than when buying gold.

In this article, we will be discussing what crypto trading is and how to manage risk when trading cryptocurrency. 

What is Crypto Trading?

Cryptocurrency trading can be simplified by exchanging a digital asset for another or fiat currency in a market move. More specifically, a crypto trader 

invests their money when the coin’s value falls, and when the currency’s price rises, they convert the money into fiat or stablecoins and wait for it to fall.

Investing in any crypto asset is relatively easy. The reason is that all you have to do is invest your money and wait for the digital asset to increase over time. You can then withdraw your money when needed. It’s more like investing your money in real estate. The value of digital assets increases over time.

However, when it comes to trading, you don’t hold a fortune. Instead, you buy and sell in a short period. 

How Risk Management Can Help When Trading Crypto

Risk is any decision you make that harms your portfolio and potentially loses you money.

Every situation carries many risks for every person in the world. In addition, everyone out there unconsciously minimises the risks that arise in particular individual situations. You can’t expect to make decent profits trading crypto without developing a risk mitigation strategy.

Your focus on the highest possible risks in a trading situation will have directly proportional results. Anyone looking to try their luck in cryptocurrency trading knows that the practice comes with a tremendous amount of strain. Nonetheless, the acceptance of cryptocurrencies is growing every day. Seasoned investors are finding that it’s not all about luck; it’s about having a solid strategy in hand.

Beginners often focus on potential gains without considering the risks involved.

So, to sum up, risk management means finding the risks involved and implementing a well thought out strategy to deal with the situation and minimise losses.

Well, when it comes to risk management, four strategies work best in most situations, such as:

Risk Limitation

Risk limitation is something you should include in your crypto trading strategy. Risk limits are implemented through “stop losses”. With a solid understanding of technical market analysis, you should execute this strategy effectively.

The use of “stop-loss” must be thoroughly understood through technical analysis of price charts. If you want to implement a “stop-loss”, you need to look for a few things such as:

  • Entry price: You should calculate the entry price for each trade. After digging the charts, you need to find the best price for your listing. Usually, the best entry points are support and resistance levels.
  • It would help if you placed your ideal win price above its current position. If the market goes up, take a profit and exit the trade. If the market keeps going up, don’t be greedy. It is always better to take a profit and exit.
  • Instead, it would help if you placed your stop loss below its current position. This way, you can limit your losses when the market falls.

Risk Acceptance

Risk acceptance is when you recognise that the potential loss of an investment in a particular asset is less than the risk of missing out on your investment.

Sometimes this strategy can lead to disappointment and a lack of confidence in your trading abilities when it turns out that the risk is higher than you.

Risk Avoidance

Suppose you plan to trade the market when an event occurs. For example, in the GBTC unlocking case that happened last year, there were rumours that the price of Bitcoin would fall below $25,000.

The biggest unlock on July 18 shut down the entire market, but the price of bitcoin failed to fall below $27,000. In such uncertain times, you should employ a strategy called risk avoidance.

Risk avoidance refers to stopping trading when a particular event could have a negative impact on an asset’s price.

Risk Transference

Another strategy to avoid when trading cryptocurrencies is risk transfer. You should know that you are solely responsible for investing your money in cryptocurrencies, whether you win or lose. You can ask a third party (such as a brokerage firm) to trade commodities for you. This allows you to transfer potential risks. Unfortunately, you will most likely have to pay for it. Therefore, your final profit will be less than if you were trading alone.

This will severely hurt your profits in the long run. Hence, it is not considered a good strategy to implement during your trading.

Other Things to Consider

  • The duration of the trading varies. Another thing you must do is always diversify your portfolio so that if the price of one coin falls, the other coins can keep the value of your portfolio.
  • Sometimes some coins also have increased manifolds compared to other coins. A diversified portfolio will reduce your to losses if a coin outperforms your expectations. Risks can only be minimised if you don’t put all your eggs in one basket. In short, don’t just use one cryptocurrency.
  • There is always money to put in a falling currency. If you invest in a currency that is trending down, invest more to lower the average. When the bulls are in power, you’ll make a significant profit.

Conclusion

No trader makes a perfect trade, meaning no trader buys or sells at the ideal time. Therefore, you should also expect some losses and wins. If you’re losing money, you also have to trust the technology you’re buying.

The goal of all traders is to make a profit. However, the trader’s goal should be to stop and minimise the potential losses from trading hours. If you are new to this practice, you should be patient.