3 risk management techniques for cryptocurrency trading
Buying and selling digital assets such as Bitcoin and Ethereum so one can generate additional cash is now very popular amongst retail investors. However, this method of income generation does of course come with a large amount of risk that must be properly managed; this is known to many people as risk management. (Editor’s note: It is advisable to consult with a debt management professional like the London insolvency practitioners Hudson Weir to help you plan your investments carefully and avoid personal debt.)
Making money or losing money often comes down to how a trader is able to understand and mitigate that very risk. We will now walk through the top risk management strategies and techniques so you can ensure you make a profit and not a loss.
Stop losses and take profit targets
Stop losses, or SLs, and take profit targets, or TPs, are key and must be understood in order to level up your risk management. SLs are used in order to stop losses from getting too large if a trade for whatever reason is going against you. However, on the other hand, TPs are used by traders to auto-lock in profits so they can ensure they’re making a return on each trade.
By not using an SL or TP, it will limit your profitability as you will not be closing positions that you should, and you will not be taking profit when you could. A classic example of needing to use an SL is with emotional traders. A trader may refuse to close a trade because they believe it can reverse, which is risky as their losses could increase. Crypto trading bots and signal groups (e.g. crypto signals) are important for the automatic implementation of a take profit even before you enter a trade. This means you do not necessarily have to make decisions by yourself in the moment.
Sizing of positions is the next risk technique we will now take a look at. The idea behind it is straightforward and states that trades may use only a small amount of their total balance in one trade at any given time. This has the distinct benefit of protecting a trader if a position for whatever reason were to go wrong. The trader should instead be using a small amount such as two per cent for each trade. The benefit of this risk management strategy is that if a trade goes bad, then you lose only a small part of your initial balance.
The final technique we now need to look at is risk/reward. Any trade you enter into must be looking to make you more than you lose, monetarily speaking. This is simply to understand, but has the very real benefit of protecting your capital as well as growing it. By using this, a trader can make significantly more income and not need to get every trade correct. The important lesson to grasp here is this: the risk/reward ratio must be favourable before you enter into the trade.
The formula for calculating risk/reward is as follows:
(Target – entry)/(entry – stop loss)
You can use the below guide/template guide for knowing what a good and bad risk/reward ratio looks like.
• 1:1 is breakeven • 1:2 is great to trade • 1:3 is even better and may be a perfect ratio
Anything less than 1:1 risk/reward ratio is unfavorable and should not be a trade you want to enter into all the time.
To finish off, you do not need to be an expert trader to practice fantastic risk management. Basic things like using a stop loss and take profit target are more than enough to make sure you stand a better chance of being a profitable trader.