By failing to plan, you plan to fail. This has been all too true for many who trade cryptocurrency, stocks, and many other assets. Utilizing proper trading risk management with cryptocurrency is an important part of investing and may even save you from losing your whole life savings.
Think of it this way, one moment you’re reading about the hottest new ERC20 token to pump your bank account balance into, you jump straight into action without any thought, the price of this so-called “next big token” crashes and BOOM…all your cash has gone bye-bye.
If only you had used proper risk management tactics, you would have limited your losses in that complete failure of an investment. To continue our educational series, this will be a one-on-one article on how to manage your risk in crypto trading.
What is risk management?
Risk management is the process of identifying and controlling threats to your capital. Using this process helps to limit your losses in the market by assessing how much you can afford to lose.
In a way, risk management is similar to having self-control when it comes to tempting pleasures. You’ll want to limit yourself to how many cookies you eat per week so you don’t gain weight or even how much alcohol you drink (just a little hint so you can lose the beer belly, Brian).
You wouldn’t want to risk more capital than you’re worth, and that is where risk management comes in, to help you control your trading desires.
Tip #1 – Survival is most important
You’ve probably heard stories of those who became rich in crypto by just investing a few bucks into a certain coin or token. Just because those featured in these stories earned a fortune from their investment, it doesn’t necessarily mean you should follow their same practice.
Just because someone did something that works for them, it doesn’t mean that it will work for you. This is known as survivorship bias – positive stories that highlight successful people but ignore those who have failed.
How many stories have you heard about those who lost in a lottery drawing? Probably not many, otherwise there would be thousands of stories to publish! You only hear about success because that is simply what makes headlines. The same goes here in crypto investing, you’ll only hear about those who struck it rich in the market but rarely about those who lost everything.
Crypto is still a rather new technology and concept that has multiple growth cycles ahead of it. Think of the future and be sure to allocate funds for future trends to hop into. You may thank your past self that you set aside money and didn’t blow it all into one asset.
Tip #2 – Write down your risk limits/portfolio allocation and follow your guidelines
Your portfolio, your rules. Don’t feel pushed into having to do something you don’t want to do. Spread your portfolio capital allocations out depending on what works best for you.
An example would be that a more experienced trader may put most of their capital into leveraged futures. For someone that is new to the crypto market, they probably will avoid leverage, and instead, put most of their portfolio into established coins like BTC and ETH. The less experienced trader would only want to put between 10-15% allocated to smaller coins considering placing a higher amount would carry higher risk.
Tip #3 – Have reasonable expectations about your returns, set take profit goals
Treat yourself to taking profits once in a while. Define at what percentage increase you’ll start taking profits.
When you witness a project that you invested in jump up 3x, you might initially think that holding onto the potion would be a smart idea on the chance that it may go even further. This could very well happen, but it’s never a bad thing to secure some profits in case the position turns against you.
Never get greedy and always maintain control of your actions. Setting take profit goals in advance allows you to avoid taking too much risk or doing other irrational behaviors.
Tip #4 – Trading bots can also use risk management
Developing a risk management plan definitely takes time but maintaining that plan while also on a busy schedule is tough. Using algo trading bots can help aid your risk management strategy.
For example, dollar cost average (DCA) is a strategy to help you accumulate coins as the price goes down, in order for you to fully profit from the eventual bounce. Using this strategy would require timing to capitalize on market trends, which many on a busy schedule would find difficult to do. By using a trading bot, the bot’s algorithm will automatically follow a DCA plan when trading, even while you’re sleeping.
It’s also good to invest portions of your portfolio into different types of bots, such as scalping bots. This will allow you to make money during ranging markets while your spot portfolio is stagnating. Diversifying your funds into several bots also ensures that you have both exposures for the long-term through spot holding and for the short-term through the scalping bot, so your portfolio is relatively balanced.
Regardless of what your risk management strategy may be, it’s important to always do your research. Conduct a thorough investigation into the crypto or project you wish to invest in and make sure to map out a plan of how much you’re willing to risk. Of course, if you ever need assistance maintaining your crypto trading strategy, you can always turn to the UpBots platform.
And now a meme from our community…