Risk management is the backbone behind every successful trader. This is even more so for the highly volatile cryptocurrency markets.
In trading, the risk is usually defined as the probability of a negative event happening during the trade. A 70 percent risk on a long position would entail a 70 percent chance of the position decreasing in value and resulting in losses.
While there are different types of risk associated with crypto trading, we will be focusing on market risk (the possibility of losses due to factors that affect the overall performance of investments in the financial markets) today.
There are three main strategies to manage risk when executing your trades.
Firstly, you should limit your exposure by sizing your trading positions. It is generally not advised to place more than 1 percent of your overall portfolio into a single trade.
This is to prevent the situation where your portfolio is overly dependent on a single position. Ideally, your portfolio should be sufficiently diversified and be defensible against different types of market movements.
Secondly, one should endeavor to set stop losses and take profit points. A stop-loss is an order placed to buy or sell a specific stock once the stock reaches a certain price. It is designed to limit a trader’s loss on a position.
On the other hand, A take profit order is a standing order put in place by traders to maximize their profits. It specifies a certain price above the purchase price, which is chosen by the trader. If the price of a position reaches that limit, it will automatically trigger a sale. The take profit order is intended to enable a trader to cash out on his profits before the market retraces.
Stop losses and take profit orders are usually set before one enters a position. The prices for these orders can be calculated through a technical analysis of the position’s historical price performance.
Apart from sizing your trading positions wisely and setting orders, one should also be mindful of the effect psychology plays on trading decisions.
Emotions can affect not just the nature of the decision but also the speed at which you make it. Anger can lead to impatience and rash decision-making. If you’re excited, you might make quick decisions without considering the implications.
Hence, traders need to manage them accordingly. The key to that is to adopt a structured framework for each trading decision. This framework should be based solely on quantitative data, minimizing the effect of emotions in influencing a decision.
Crucially, one should keep a clear head amidst the media frenzy around cryptocurrencies. Often, only 10 percent of the news reported will have an impact on the market. Therefore, it is important to sieve through the ‘noise’ and not make trading decisions based solely on media sentiment.
In conclusion, the role a robust risk management plan plays for a trader is similar to what a good defense can do for a soccer team — it enables them to attack without the fear of being exposed. The trader that manages risk the best is the one who will win in the long term.
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SnapBots(www.snapbots.io) is artificial intelligence (AI) crypto trading bots provider in BVI with global users. Driven by its focus on fields of machine learning and deep learning, it aims to supply trading bots as a service. Based on big data technology, SnapBots generate AI chart pattern trading signals.
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