Are you or a loved one suffering from poor risk management? Do you get occasional headaches when you see your profits down the drain? Do you get restless when your stop-loss activates and the charts go back up? My friend, what you need is to check out the guide “Risk Management Plan For Intermediate Traders!” — approved by 8 out of every 10 dentists (not really).
Now that I have your attention, let’s talk about risk management in cryptocurrency trading. Volatility is out there—sometimes it’ll play in your favor, but sometimes it won’t. When it doesn’t you’ll want to be prepared. Think of it like wearing a helmet. You never really need to wear a helmet—until you really need one. Risk management is the same thing. So if you have the knowledge to take that next step in your journey, becoming a great risk manager will heavily benefit your trades.
Risk Management Plan for Intermediate Traders
For intermediate traders, risk management is not really something they’ve not heard about. After all, in all likelihood, these more seasoned investors have been through the good and the bad parts of trading.
After experiencing gains and losses in that journey, there comes a time in every trader’s life when they’ll need to improve on their risk management strategies in order to maximize their profits.
Some experienced investors argue that proper risk management strategies are even more important than being good at analyzing market movements. When you think about it, the market is binary, meaning it will only move up or down. If you get good at protecting your picks from it going the opposite way—you greatly enhance your chances of riding the market.
Crypto Risk Management Strategies Prep
For starters, let’s cover our basics. What you need to know to consider yourself a mid-tier trader is that once in a while—pardon my French—poop happens. And when it happens, you’ll want to be prepared.
Hot wallets are cool, easy, and accessible. And there are a bunch of them in the market that do a fantastic job of protecting your crypto assets. However, at the end of the day, a hot wallet ultimately means that your funds are at more risk. Transferring your savings to a cold wallet is safer, and allows you to keep your money locked in with you.
That is not to say that you should keep all of your crypto in a cold wallet. Diversification is also a form of risk management, meaning that keeping the bulk of your funds “cold”, while using part of them in a hot wallet to invest and diversify is your best bet. Better yet, most cold wallets today have direct portability to hot wallets, making the operation seamless and quick.
Stay Up to Date
As important as knowing chart patterns is, staying up to date with the news and developments in the industry is also a key feature of a good trader. Knowing upcoming trends and developments in the market will save you quite a few bad bets. For instance—you may not want to hold your leveraged Bitcoin call if the news is talking about a potential interest rate increase by the Fed. No matter how bullish the chart looks, the trend will most likely stop if that happens.
As far as news goes, we got you covered. Bitcoinsensus.com provides you with daily market coverage, crypto updates, analysis, and more.
Intermediate Trading Risk Plan
Here is a step-by-step plan for setting up a decent trading risk plan:
Setting Risk Limits
Investing sure is exciting, but it doesn’t have to be too exciting. Analyze your balance and come to terms with how much you are willing to lose if the operation goes sideways. Doing so adds the huge benefit of leaving the emotional part out of your trades.
Creating a Trading Checklist
Making a checklist before executing a trade might benefit you greatly once it becomes a habit. By creating an inventory of actions that precede your trading, you once again remove emotion from the equation, leaving with a clear-headed decision.
A common checklist would look like:
- Market analysis
- Relevant news updates
- Deciding entry and exit points
- Size of the operation
- Stop Loss (how much you’re willing to lose)
Follow a Trading Schedule
Trading is immensely satisfying. Your positions pay off, you feel like you’re printing money out of thin air—the whole thing is awesome. The problem, however, is that you may become “addicted” to that sentiment, going out of your way to chase that feeling “just one more time”. When you’re doing so, you’ll most likely be losing money.
The thing is, investing is a rational process. Adhering to a trading schedule is great because it helps you keep “rational” because no good things ever come from being irrational. So limit your trading hours to a couple a day, always make sure you follow the checklist, drink tons of water, and have fun, that’s all we’re asking.
Trading Risk Reduction Tips
For starters, I think you’ll get the trend of this article that primarily, the most risk reduction you can do is remove as much as “you” from your trades. Nothing personal though, you’re a cool person, it’s just that when numbers are going up or down, we all tend to make mistakes.
To get technical, a good tip is to avoid being over-leveraged in your trades. Sure you may make huge money with extra leverage, but it is also a great way to wipe out your account in a couple of minutes.
Making use of ‘limit orders’ is also a great way to trade responsibly. Given that in this type of trading, you specify exactly when you want to get in and when you want to get out, the whole operation is more “controllable” according to your analysis.
Risk Management in Crypto Trading
Everyone knows that the crypto market is volatile. Arguably the most volatile market in the world. This makes it potentially profitable, but also potentially… not profitable.
This means that crypto traders must have their risk management on point. Those that do so are putting themselves in the position of riding the market when it goes in their favor, while also protecting their funds when it doesn’t.
Position Sizing in Trading
It’s generally not a great idea to go all in. Even if you’re 100% sure of your trade, why risk it all in one bet? The benefit won’t outweigh the negative impact it will have on your balance and your psyche.
Risk/Reward Ratio Trading
Assessing the risk/reward ratio is a great way to make sure your position is solid. To do so you need to consider how much of your balance will be involved in that trade, how much you’ll make if it goes your way, and how much are you willing to lose.
Let’s say you want to buy Bitcoin at $100,000. You see a surge in volume, optimistic news, and you analyze that the next potential resistance is at $106,000. On the other hand, there may be a chance the asset retests the $95,000 support.
By setting a stop-loss at $95,000, you limit your potential loss to $5,000 per Bitcoin. If the trade goes your way and Bitcoin reaches $106,000, you’ll gain $6,000 per Bitcoin.
Stop Loss Strategies
Stop losses are a trader’s best friend. A well-placed stop-loss will literally save you from losing all your money.
However, a poorly placed stop-loss is often the most annoying aspect of trading. More often than not, assets may move back to pick up liquidity before continuing to move. If your stop-loss is too close to the entry margin, that liquidity the market just picked up is—well—your money.
Things get iffy here because no one likes to lose money. But also, investors must be willing to lose money in the process.
The two most used strategies for stop losses are percentage-based and volatility-based. The first is really simple, think back to the Bitcoin example, buying BTC at $100,000 with a 5% stop loss means you’ll call it quits if the price touches the $95,000 zone.
Volatility-based stop losses are more advanced and arguably more useful. This strategy involves analyzing the assets’ historical volatility, setting up wider stops for volatile price zones, and tighter stops for more “stable” ones. This type of risk management involves a lot of technical analysis to understand relevant market margins and how to make use of them.
Volatility management in crypto is essential for navigating the unpredictable nature of the cryptocurrency market and ensuring that your investments are protected against significant losses.
I know what you’re thinking: “If only there was a place where folks would just do all this analysis for me”.
Well, fear not my friend! Our Legends Community provides its members with daily analysis of several different crypto assets, done by professional market analysts. If that feels useful, make sure to check it out.
Portfolio Diversification Strategies
Believe it or not, the saying “don’t put all of your eggs in one basket” was not created by basket manufacturers trying to lure you in to buy more baskets.
This saying is more intelligent than it seems, after all, it talks about a time-tested principle of risk management. Spreading around your funds in different assets means you reduce the potential impact of any single asset’s poor performance on your overall portfolio. Diversification helps balance the risk/reward ratio, providing you with a more balanced and resilient portfolio.
Psychology of Trading Risks
Dealing with your mindset might as well be the hardest part of trading. We’re only human after all, and humans make mistakes all the time. What I mean by that is that it’s incredibly hard to not take it personally when you make a wrong pick.
Trading and chess share some interesting similarities. Both are about pattern recognition, and both share the common misconception that they are somehow linked to how intelligent a person is.
In actuality, both activities are incredibly mentally taxing and are more about being able to recognize patterns than being “smart”. And yet, most people associate poor chess moves with how dumb a person is, much like you may have thought of how stupid you are for that one particularly bad trade.
Continuing on the chess analysis, a series of bad games may cause a player to “tilt”, leaving him to make poor choices in his next games. This parallels incredibly well with investments, as the exact same thing may happen to inexperienced traders.
Dealing with your psyche is the single most important thing you can do. This involves following all the steps found in this article, but also keeping a healthy lifestyle, a positive mindset, and understanding that you do not have to trade today if you’re not feeling like it.
Chasing the rabbit hole of trying “one more” to recover lost funds may be the single most destructive behavior that causes investors to wipe out their accounts. Understand that you’ll win and lose many times during this journey, the best you can do is set up good risk management strategies to minimize those losses. Managing trading losses effectively is a crucial part of this process.
Trading Journal for Risk Management
“Dear diary, today I messed up on a trade, but good risk management saved me from losing the little there is left of my hair.”
Keeping a diary may seem silly. But relax, you will not be using it to write down the name of the boy you’re in love with— I mean you… can—but rather to keep track of your trading routine, checking out for your wins and losses.
It is also a great way to learn from your mistakes. When you write down why something went bad, it helps you get a better perspective of the occurrence, leading you to better understand why it happened.
Wrapping Things Up
Wrapping things up, it’s clear that successful trading isn’t just about picking winners—it’s about managing your risks wisely. Financial risk assessment trading is an essential part of this process. By assessing the potential risks and rewards of each trade, you can make informed decisions and protect your hard-earned capital.
If you’re interested in learning more about improving your trading skills, make sure to check out our Legends Community with daily analysis, exclusive Bitcoin and Altcoin updates, and all the information you’ll need to get better at trading!
