Virtual currency trading is a tool that will help you earn a good income. But it is essential to understand not only how to convert cryptocurrency to real money but also to understand how to save income. Risk Management will help you reduce the likelihood of losing your capital and avoid unpleasant situations.
All users know that the currency market is very volatile. If you made a good profit today, this does not mean it will be possible to repeat it tomorrow. A lack of excitement and a cool head will help keep the profit. But still, it is worth learning about risk management tools, which will help you avoid unpleasant situations.
What is Risk Management in Cryptocurrency
Being engaged in crypto trading, you will definitely encounter unpleasant situations. It could be:
- cost fluctuations;
- failure to fulfill the terms of the contract;
- loss of investment.
Of course, these are not all situations that can be encountered. Understanding the importance of risk management is essential to minimize negative consequences or even avoid unpleasant situations. It's not as difficult as it seems. But simple rules and strategies will help you avoid disappointment.
How Risk Management Can Help You Trade Cryptocurrencies
Risk management is needed to minimize the adverse effects of crypto market volatility. With the help of rules and strategies, you can save the income you receive.
A detailed analysis of the market and cryptocurrencies will allow you to invest in an asset that will definitely bring income. The appearance of new assets on the market often provokes a surge of interest. But it should be understood that not every cryptocurrency will be successful and bring income. Thanks to risk control strategies, you can avoid unnecessary expenses and protect your investment portfolio.
We have compiled best practices to help you protect your capital. It is best to combine several options to avoid negative consequences when trading virtual assets.
Popular Risk Management Strategies
Risk mitigation is necessary for both beginners in crypto futures trading and experienced users. We advise you to use several strategies so that trading is as safe as possible.
1% rule
It is a reasonably simple strategy where you risk only 1% of your total capital. For example, you have 1000 dollars. In this case, you can purchase assets for $10. Thus, traders insure their money in case of high market volatility.
The 1% strategy works with almost all assets. It is not necessary to operate with dollars or other fiat funds. You can use this method for all cryptocurrencies and altcoins.
With this strategy, you can avoid rash purchases in the market. Plus, this strategy will give you more control over your investment.
Invest Only the Amount You Can Spend
When trading, it is always essential to keep the risks in mind. So don't use more than you can afford to spend. Setting a daily limit above which you cannot spend is best. Thus, it will be possible to avoid rash waste on unprofitable transactions.
It is not necessary to strictly adhere to the 1% strategy. You can allocate more. But you should always be prepared for the fact that you can lose this money. Therefore, it should be a small amount of coins that will not seriously damage your income.
Estimate Position Sizes
When evaluating position size, it is essential to understand how much you can lose. Crypto trading is not only a permanent income. There are also risks and costs. A fixed expense will allow you to avoid wasting all your capital.
You can constantly operate with identical amounts and calculate interest. But it is always necessary to evaluate the size of positions, regardless of the size of the transaction and potential profit.
Set Stop-Loss and Take-Profit Points
The stop-loss point indicates the price at which the order will be closed. Usually, this price is below the market price, which avoids further financial losses. With take profit, the cost is set higher, which helps to generate income.
The main advantage of this strategy is that it can be set automatically. You do not need to constantly monitor the market and follow the cryptocurrency rate. Even in a volatile market, you can control the risks, a massive plus of this strategy. Separately, it is worth noting that stop loss and take profit can be set at any time. Thanks to this, you can trade both during the day and at night.
In a stop-loss and take-profit strategy, it is essential to set indicators in advance. Do not wait until the market reaches the peak point of activity. It is also better to avoid long positions.
Diversify Your Portfolio
Portfolio protection is another cryptocurrency risk management strategy. You can use different coins and assets to avoid losing your investment. Even if one asset drops in value, you will still have options to trade with.
The more diverse the cryptocurrency portfolio, the more protected your money is. It doesn't have to be just cryptocurrencies. Non-fungible tokens, securities, and metals can be used to protect against risks.
The Four Golden Rules for Cryptocurrency Risk Management
To correctly manage risks when trading cryptocurrencies, it is essential not only to choose a good strategy. There are a few basic rules that will help you deal with the negative aspects of the virtual market:
- emotional control and discipline;
- constantly learning;
- use cold storage;
- realistic expectations.
Emotion control and discipline are what will help you in risk assessment. Fear of loss, greed, and joy from a successful transaction can cloud common sense. It will lead to impulsive decisions that will have an extremely negative impact on your income. Therefore, sticking to a trading strategy and plan is extremely important.
The cryptocurrency market is constantly changing. And it is essential to understand what the emergence of new coins or rules will lead to. Ongoing training is necessary to assess potential risks properly.
It would be best not to store all your assets on exchanges. Cold storage is what allows you to keep your cryptocurrency safe. Foremost, because it is not constantly connected to the Internet, attackers will not be able to hack the wallet. It is worth storing only the amount of cryptocurrency you work with on trading platforms.
There is nothing wrong with wanting to make big profits. But it would help if you understood that earning half the investment on the first day would not work. Set realistic goals and break considerable amounts into small chunks. This way, you can avoid significant failures.
Risk management is an essential element for successful cryptocurrency trading. You can insure your investments and cryptocurrency portfolio using strategies and special tools. Don't make complicated plans. Many successful traders use simple options to minimize the negative impact when trading.
