If you get everything right and you don’t understand risk management in crypto trading, there is a high probability that you are going to regret it.
Risk refers to the probability of a negative event happening in your activities; an event that goes contrary to your intended outcome.
Simply put, Risk management in crypto trading is the amount of money that a trader or investor will lose if a trade or investment goes against them.
There is a risk in cryptocurrency. Just like you can make a lot of money, you can also lose a lot of money.
It has been proven statistically that 90% of traders get frustrated.
Bulls get money, bears get money, the rest lose money.
Who is The Rest?
These are people who do not have proper risk management.
Irrespective of your capital, you are bound to lose money within minutes if you do not manage your risk well.
Risk management is the ability to predict and control possible losses from an unsuccessful trade.
A successful trader is not someone that does not make a loss. A successful trader is a person that manages their risk very well.
Proper risk management involves:
- Accepting risk wholeheartedly
- Risking a small percentage of your capital
- Having a good risk-reward ratio
Importance Of Risk Management
- You cannot predict the market with utmost certainty.
The cryptocurrency market is very volatile and not a respecter of anyone. Even if you are sure of your trade beyond all reasonable doubt, there are still chances that you might lose.
Risk management in crypto trading is highly important because you cannot predict the market with utmost certainty.
You can not be 100% correct.
- Rule of thumb
The rule of thumb says, the shorter the time frame, the more difficult it is to predict the market.
Though it is easier for an investor if they are investing for the long term than a trader because the more you trade, the higher the risk.
Risk management will help you to reduce the risk while trading and investing.
- Common mistakes
One of the common mistakes by traders is overconfidence. Confidence thrives, overconfidence kills.
Your trading strategy might be the best but using risk management will help you avoid common mistakes of greed and overconfidence.
- Decrease in potential loss
There is the potential of losing in all trades. Risk management is not a measure to avoid risk but an instrument for reducing the risk.
- Control threats to your capital
He who fights and runs away lives to fight another day.
If you are bad at managing your risk, your capital will say it all.
Proper risk management will help you to control the threats to your capital and in turn, help you make a reasonable profit in the long run.
Facts About Cryptocurrency Trading And Investment
- Making money is possible
Cryptocurrency trading and investment have been a known way to make money.
This is evident in the bull run of 2017 and 2021 and irrespective of the general market trend, it is possible to make money.
- Losing money is guaranteed
Making money in cryptocurrency is possible but not guaranteed.
The only thing that is guaranteed in cryptocurrency trading and investment is loss.
You are bound to lose your money though it is possible to make money.
- You cannot control the market
No matter how good you are, you cannot control the market. So the best way is to follow the market.
- You can only control yourself and risk
If there is any chance that you will be able to control anything at all in cryptocurrency trading and investment, you can only control yourself and the risk.
You can determine the kind of trade that you want to take and also the amount of money that you are willing to lose.
- Lack of risk management is the single most important factor why some people stopped trading
Poor risk management leads to loss, steady loss frustrates traders, frustrated traders stop trading. This is why many traders stop trading.
Acceptable and unacceptable risk
Before taking any trade, ask yourself these questions
- How will I feel if I lose this trade?
- What will be the financial impact?
- What is the worst scenario of my trading?
If you cannot accept the worst scenario, if it will make you feel bad, don’t take the trade or, as another option, reduce the risk to what is acceptable to you.
5 Possible Outcomes Of Trading And Investing
- Big win
- Small win
- Small loss
- Big loss
How to eliminate big losses?
The only possible way to eliminate big losses is by using a stop loss.
Stop-loss is an order that helps to cut the losing trade. It is a primary tool for risk management.
Types Of Stop-loss
- Physical stop loss
This is the use of a specific price limit. For instance, if you bought bitcoin at $45000, you can put your stop loss at $44000.
With the stop loss, your trade will be canceled when BTC reaches $44,000 and your losses will be minimal than leaving your trade without stop loss and losing your capital.
- Mental stop loss
This does not imply setting a physical stop but understanding the level of emotion in trades.
When using this stop loss, you are more subjective in your decisions because a glimpse of hope might make you hold the trade.
- Stop-loss as a percentage of capital
This is the most commonly used by professional traders.
It entails setting stop-loss as a percentage of your capital.
If your capital is $1,000 and your risk percentage is 1%. That means you can only risk $10 on a single trade.
Risking 1% is the most reasonable because that means you will need a hundred losing streak before you can lose your entire capital.
Assuming your risk is 50% of your capital, you will only need just 2 wrong trades before you will be liquidated.
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