How to Manage (Minimize) Crypto Trading Risk
Whether you are trading crypto futures or simply investing in (buying and holding) cryptocurrencies, it is important to know how to manage risk in crypto trading. Here, you will learn about some foolproof ways to manage your crypto trading risk with a strong trading plan.
Let’s start with the basics.
What is risk management in crypto trading?
The crypto market is highly volatile. If you are not careful or don’t have a trading plan, you can end up losing all your money in a crypto crash. Risk management is how you eliminate or minimize the risks of incurring losses in your crypto trading activities.
Why is risk management important in crypto investing & futures trading?
When you are trading cryptocurrencies, you are dealing with a highly volatile asset. As we have seen multiple times, the crypto market can crash or boom at any time and without an indication, which is why it’s important to have a failsafe plan. Most importantly, a risk management plan will help protect your trading account from losing all its money.
Risk management starts with having a trading plan, including targets and stop losses. This will help ensure you limit your losses while also having enough scope for your investments to grow.
How to build a solid crypto trading risk management strategy
1. Create a trading plan
As I said before, having a trading plan for cryptocurrency is highly important. It will guide you to consistently earn profits while minimizing your risks. Here’s what an ideal crypto trading plan would include:
- A detailed plan on how and when you would enter/exit positions
- Entry and exit indicators
- Stop loss
- Target profits
- Position sizing
Having a rock-solid trading plan in place will not help you limit your losses but also give you much-needed peace of mind. For instance, by setting stop-losses for all your trades, you put a limit on the maximum loss you can incur, which is ideally an amount you can comfortably afford to lose. The long-term benefit of having a trading plan is that you’ll eventually become aware of your trading habits, which will enable you to make more accurate plans with long-term goals in mind.
2. Follow the plan
When trading cryptocurrencies, always stick to the plan. It is normal for traders to get carried away by the Fear of Missing out (FOMO) and invest in the wrong asset at the wrong time. This particularly happens when you are losing. It’s like betting more and more with the hope to regain what you lost and eventually losing everything.
A serious investor, however, always follows the plan, especially when they’re losing so as to minimize their losses.
3. Stop-loss
I know we have already talked about this before, but this is just way too important to not talk more. Stop-loss is one of the most crucial parts of a trading risk management strategy and one that is often neglected. It involves setting a limit on the maximum amount you can lose on an investment. For example, the bitcoin price is on a downward trend right now. So, if you are trading bitcoin futures, you might want to use stop-loss to set a lower limit on bitcoin price, i.e. a price limit where your sell order will be automatically executed to stop further losses.
4. Never trade or invest more than what you can afford to lose
5. Do not risk more than 5–10% of your capital at a time
6. Put a part of your crypto capital in more stable cryptocurrencies such as the Libra Coin to enjoy good, long-term benefits with limited volatility. This is like putting some of your money in debt instruments to diversify the risk. Libra Coin is the best coin for this purpose. Find out more at https://libraecosystem.com/
