Trading or investing in cryptocurrencies can be highly lucrative. But the extreme price movements often discourage beginners to buy cryptocurrencies. However, with a carefully charted risk management plan, it is possible to make gains and minimize losses.
Here are the 7 golden rules of risk management for cryptocurrency traders
Diversify your portfolio
One of the effective risk management strategies for a cryptocurrency trader is to diversify your portfolio. You must ensure that you put only some of the investments in a few carefully chosen cryptocurrencies, instead of putting all your money in just one. For instance, you might consider buying Kusama along with Bitcoin or Ethereum, after checking the Kusama Price on that day.
Set up your stop-loss orders
A stop-loss order, in simple terms, is a preset order that will sell a part or all of the holdings automatically if the cryptocurrency price drops to some extent. It works like a safety net that helps in minimizing the loss for you, provided the market moves against you. When you set stop loss orders, you can reduce the losses and protect the investments. You need to put stop-loss orders at the proper levels.
Use the proper position sizing
Position sizing plays a crucial role in risk management. Regarding position sizing, you need to allocate some specific trade amount in your portfolio. You have to use the correct position size to manage the risk well. You need to ensure that you do not take a lot of trouble on a single trade, as it can lead to a lot of losses. In simple terms, you need to raise only one to 2% of the complete portfolio on one trade, so even if there is a loss, it will not impact your portfolio to a great extent.
Set only realistic profit goals
When you have a clear profit goal at the back of your mind, you can manage risk to a great extent. You need to ensure realistic profit goals depending on the market trends and technical analysis. Avoid getting greedy when you are in the grade you set unrealistic high profits, which can lead to risky trading decisions. You have to ensure that you are disciplined, stick to the profit target, and lock in the gain at the right time.
Do your own research (DYOR)
Information and market sentiment play a crucial role in the cryptocurrency market, so you must have all the information regarding the trade and prices. When you have the correct information on the latest developments and news, you can trade well. To have the correct information, you must do some research on all the cryptocurrencies that you are trading, like the technology market capitalization trading volume and historical price performance.
Consider using leverage with care
Leverage makes it very easy for you to trade with a considerable capital amount, and it is eventually more than what you have. Leverage is both a boon and, of course, it can lead to huge profits and losses at the same time.
Even though leverage can help in improving your potential income, it can also increase the risk of losses to a great extent. You need to use leverage with a lot of care and thoroughly understand all the risks involved before you consider implementing it in your strategy.
Lastly, you need to ensure that you keep your leverage high and have the right stop-loss orders whenever you are trading with leverage. This will help you in managing your risk well.
Manage your emotions
Emotions like fear or greed can have a significant impact on your decision-making process, and they can also lead to impulsive trading decisions. This can lead to risks unnecessarily, so it is essential for you to keep a check on your emotions and maintain a rational approach while you are trading. You need to ensure that you avoid making any impulsive decisions based on fear or greed and stick to your risk management plan. It is OK to take a step back and reconsider your emotions when you feel that your emotions are taking over.
In short, risk management is a critical element of cryptocurrency trading, considering the volatile nature of the market. When you follow these rules for risk management, you can indeed reduce your potential losses.