Risk Management in Cryptocurrency

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Managing Risk When Crypto Trading

Every industry comes with risk, a possibility that things won’t go the way you envision. The cryptocurrency industry is no different: there is always the chance that you will make a poor trade and suffer financial losses as a consequence. Say you open a short position with a 35% risk, for instance. It carries with it a 35% chance that the price of Bitcoin will rise, not fall, meaning that you will be left out of pocket. Just because there are risks, it doesn’t mean they can’t be mitigated though. By following these straightforward guidelines, you can maximize your profits and avoid unwanted losses when trading cryptocurrency.

Risk Minimization Strategies

A useful piece of advice for trading crypto is to never invest beyond your means. A safe figure to aim for is around 10% of your available budget or income. It is also unwise to risk loaned money on crypto, as this could put you in poor credit standing.

Beyond this all-purpose strategy for safe crypto trading, there are three others which you should adhere to.

• Position Sizing

Put simply, position sizing is a method of quantifying your total trading capital and using that to inform how much you invest in any given trade. The allure of great riches leads many crypto traders to act emotionally and invest 80%, 90% or even 100% of their worth, an incredibly risky move. By position sizing, you can avoid such ‘risk-all’ investments.

Want to learn more about position sizing? Here is one method of establishing it.

• Investment Vs Risk

This position sizing strategy involves weighing up two different sums. The first is your investment limit, the most you are willing to invest in any one deal. The second is the maximum risk, the most you stand to lose on that one deal. By working out this worst-case scenario prior to diving into the deal, you can work out whether the associated risk is worth taking.

• Risk and Reward Ratio

This refers to the direct weighing up of the risk and rewards of your trades. After all, the riskiest deals in crypto trading can be the most lucrative, so quantifying and comparing the real-world risks and rewards will help you determine which trades are worth entering and which are likely to result in a loss.

• Stop Loss and Take Profit

Stop Loss is a top-level order which automatically shuts down an open position when the price of Crypto falls below a predetermined threshold. Conversely, Take Profit does the opposite, selling open orders when the price reaches a certain high.

Both work hand-in-hand to help you avoid major losses and snatch up golden opportunities. Stop Loss will shield you from partaking in unsavory deals, while Take Profit will help you maximize the profit from a trade before the price falls once again.

If you’re looking to utilise this method to avoid risky deals, you’ll be pleased to know that crypto terminals like Superorder let you set your Trailing Stop Losses and Take Profits directly. Sadly, the feature is not yet available with most crypto exchanges.

Crypto Trading Tips

Accept Losses

While risk can always be minimized, it can never be eliminated. As such, you will almost certainly make an unprofitable choice sooner or later. When this happens, accept it; use it as an opportunity to take stock and plan for the future.

Keep Fees In Mind

Crypto traders are  liable to pay a range of fees as part of operating in the industry, including withdrawal fees and leverage fees. Many beginners neglect to take these into account when running risk assessments, which can lead them to inadvertently take higher risks.

Think Positively

Risks are an inherently scary thing, which can be good…to an extent. Taken too far, though, fear of risks can make you wary of trading altogether. This is why it’s important to always keep your successes in mind, so that you can stay confident when facing the threat of failure.

Measure Drawdown

This is the act of calculating the total loss of your trading capital after one (or several) unprofitable trades.