Seasoned traders know that no one prevails in cryptocurrency trading 100% of the time. Crypto assets are considered high-risk investments since they are incredibly volatile. Delving into crypto trading without a proper plan can often result in irreparable losses of invested capital.
Risk management protects the investors’ accounts from losing all of their funds. It’s an essential but often underestimated requirement to be a successful trader.
What Is A Trading Plan?
Most rookie traders in the market lose their investment within the first few months of their trading journey. This is the result of not having a trading plan that’s rudimentary to their investing journey. A substantial trading plan includes these elements:
- Concise Trading Approach: This is the primary reference on which the trading plan will be based. This is derived from having a technical analysis, which means establishing the intrinsic value of the crypto asset. A trader should analyze different internal and external factors to know whether an investment is worth it.
- Trading Methodology: This refers to the procedure used to discover new investment opportunities in the market. Some well-known methods are moving averages, price action, indicators, and price structure.
- Risk Management: This process defines the protocols for how risks are managed during trade, such as how to short on Kucoin and other digital tokens.
- Markets to trade: This is where the traders will implement their actions and orders. A good market should have enough liquidity, volatility, and ease of execution. Once a market meets these conditions, you’re assured of leverage and a good range of movement in trading.
Now that you’re familiarized with the elements of trading that are essential in crypto trading, we’ll now consider effective in-depth strategies you can use to reduce the risk in crypto trading.
Five Ways to Minimize Crypto Trading Risk
1. Accustom Yourself With The Risk Management Process
In a nutshell, the risk management process is all about handling losing trades efficiently. The primary goal is to alleviate the losses. You must know the risk-reward ratio or the relationship between risk and potential reward in every given trade.
According to a veteran trader, you should employ an asymmetrical risk-reward trade risk management strategy. Allow yourself to have a 4:1 ratio, which means getting USD$4 as potential profit and USD$1 risk when investing.
An effective risk management strategy includes these elements:
- Risk per Trade: This refers to your risk appetite per investment. It’s the value that depends on your risk appetite. This is expressed by the percentage of your trading account balance.
- Initial Risk Level: This level is the threshold for the initial stop-loss. Once this is triggered, the trade will be terminated at this point.
- Position Sizing: This is the quantity of an asset that will be traded. It is directly proportional to the risk per trade because this is where it’s established. To avoid significant losses, you must learn to observe better trading opportunities that pave the way to positions with smaller capital offered by leveraged markets.
- Profit Target: This is the area where the trader will make a profit trading.
2. Understand Market Risks
Cryptocurrency is considered one of the most volatile investments, accompanied by more trading risks. These risks are primarily associated with the nature of the crypto market, such as:
- Legality Risks: There’s a lack of clarity regarding the terms of regulations and legal framework. With the increasing popularity of crypto, it’s inevitable to experience scams.
- Exchange Risks: These risks can potentially hinder your ability to crypto trade at a reasonable price. Price manipulation and connectivity issues are just two examples that can significantly influence your trading activity.
- Liquidity Risk: Liquidity means conversion efficiency into cash without severe slippage. Slippage happens when a trade is executed at a different value than expected.
These are just a few of the many risk examples you will encounter in crypto market trading. Knowing these risks is an effective strategy to form different countermeasures and prevent them from making you lose money.
3. Learn How To Measure Risks
If you’re a newbie in the market, you should set the amount of money you’re willing to lose, especially if the trade fails to conform to your expectations. If you’re a beginner, you could use the one-percent rule (1% rule) as one of your criteria. Avoid putting all your capital into a single investment. The higher your money is, the lower the percentage should be.
4. Allocate Your Capital
Diversifying your portfolio to different markets will allow for more trading opportunities. In terms of trading risk management, you should find ways to have more than one trading strategy. The market is always ever-changing, so you must learn to adapt your trades by knowing how to handle various trade-offs once it all goes downhill. This way, you’re building a more stable risk profile that maximizes your investment returns for a long time.
5. View Multiple Time Frames
Multiple time frame analysis will prevent you from making the most common mistake in trading—tunnel vision. This type of analysis will help you discern the bigger picture of the market trend instead of focusing on one. Using a top-down approach, you can filter the market triggers by finding the trades in the lower time frames.
High volatility is an inevitable driving force in the crypto market. Its promised high returns go hand in hand with various crypto trading risks. Employing the tips above will help you mitigate significant losses in your capital. If you’re a beginner trader, it would be best to have in-depth research about this.
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