Crypto risk management is one of the most critical issues when investing. Traders often enter the trade without thinking about account size and how to manage their funds, and end up incurring losses. As a result, it’s common for novice traders to invest ‘like gambling’. If this is how you’re trading, it’s time to look at some risk management practices that, when implemented well, can protect you and help you stay in the market.
What is crypto risk management?
When investing in cryptocurrency, it is a fact that negative events can occur. These can include unusual price spikes, errors and many other unpleasant events. Risk is normal in trading, and every crypto trader takes risks. Futures traders take more risk as they tend to use leverage on a regular basis. Failure to follow the necessary crypto risk management practices will affect your trading balance and you may even lose your entire capital.
Crypto risk management practices teach you how to manage risk when trading. They protect you against unfavourable events and keep your losses under control. The rules will not only protect you, but also help you achieve the desired result when the right crypto strategies are applied. Here are 8 risk management practices you can use when investing in cryptocurrency.
1- Have a solid trading plan in crypto
One of the biggest mistakes you can make as an investor is to start trading based on your instincts. We cannot deny that you can get some positive results this way. But this can only be a result of luck. You need a proper plan to manage your risk and achieve consistent results.
Your trading plan is your organised approach to trading. It is a system you create with your experience in the market to give you the hedge and results you desire. Your trading plan should include things like when to enter or exit trades, how much risk you should take when making these trades. Having all this planned out makes trading easier for you and helps you manage your money well.
2- Only invest crypto what you can afford to lose
This is an often overlooked aspect of investing. Because many investors believe that there will be no ‘accidents’ and that everything is under control.
But why should you follow this rule? There is a simple answer: Because you can lose your capital. Also, trading an amount you can’t afford to lose will result in pressure and emotional stress that can jeopardise your decisions and lead to more mistakes.
The cryptocurrency market is volatile. That’s why it’s better to trade with only a small amount of your income. While losing money is already painful, losing money you need is even more painful. Therefore, this crypto risk management item is quite critical.
3- Size your positions
The idea behind position sizing is that you should measure how much risk you are taking per trade. You should not risk 100% of your capital on a single trade. Successful traders prefer to risk a fixed percentage of their capital per trade.
Some trading experts recommend that traders, especially beginners, risk no more than 1% of their account balance on a single trade. This practice will help you limit your risk and give you control over your trading capital. Some traders consistently risk 2% per trade, others 3%. Others believe that no more than 5% of their capital should be in open trades, no matter how many opportunities they see.
The market has unexpected price fluctuations. If you risk more than you can handle, such fluctuations can panic you and push you to make irrational decisions.
4- Limit the use of leverage
Leverage allows you to trade using borrowed capital. As a result, your profits can be magnified, but so can your losses. You need to thoroughly understand how leverage works, its impact on your trading results and how you can best manage it.
Futures traders often tend to use very high leverage in order to make a lot of money. Unfortunately, they forget that a small mistake can lead them to deep losses.
5- Always calculate your risk-reward ratio
The risk-reward ratio corresponds to the risk versus the potential return expected from a trade. You should measure the risk-reward ratio of a trade before executing a trade. This is an important part of crypto risk management. If you can determine the risk versus the potential outcome, you will be more likely to go for trades with a high probability of success.
6- Have realistic expectations
Having realistic expectations is the key to crypto risk management. You can’t make a 40% monthly profit without risking too much of your capital. Having such a target will always cause you to overtrade or use too much leverage. This can lead to big losses. Setting more realistic goals will help you gain control over trading emotions such as greed, fear, and hope. This rule is very important as you need to prepare your psychology as you learn the ways of crypto risk management.
The importance of crypto risk management Crypto risk management is crucial to succeed in trading. It should be taken seriously by beginner and struggling traders. Failure to apply these methods, which are actually quite simple, can cause you to fall into difficult situations.
The difference between successful and struggling traders is not always the trading strategies used. It’s about the simplicity of the methods they apply. Successful traders usually create their trading plans quite simply. This allows them to make a profit with consistent crypto risk management.