What is Risk Management in Trading Crypto?

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Risk management is how traders can identify, assess, and control the threats or risks to have a less stressful and somewhat safer trading experience.

Crypto traders face several risks caused by several factors, including market uncertainties, technological issues, and management errors. A good trader never ignores these challenges and protects their trades by managing these risks wisely.

One of the ways to minimize the risks is to opt for a secure crypto trading platform. However, apart from choosing the right exchange, traders should also be familiar with the risk management tips discussed in this article.

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What is Risk Management?

Risk management is a system or set of rules that allows traders to mitigate risks and trade efficiently. Knowing how to manage your risks can increase your chances of having a good crypto margin trading experience.

However, if a trader is unfamiliar with the risk management tips, they can end up jeopardizing their trading positions and funds, either partially or completely.

Therefore, to manage the risks and minimize losses, crypto traders should know the tips mentioned below.

Avoid Trading Emotionally

Trading emotionally is one of the biggest mistakes a trader can make. Sometimes traders jump on a trend, simply because they experience fear of missing out and then sell in a panic, which may be at the bottom of a dump.

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Therefore, instead of following the hype of trends reported by the media, it is safer and more beneficial to analyze the market yourself and get in on the trend before everybody else. It is also important to know that hype at its peak usually indicates that the distribution phase will kick in and a downtrend will begin.

Carefully Choose an Exchange

Choosing a cryptocurrency exchange that prioritizes the security of users is one of the ways traders can limit or manage risks while trading crypto. There is a lot of volatility associated with the crypto space and the vast number of platforms adds to that uncertainty. However, while looking for an exchange you need to analyze the level of security offered by each exchange and opt for the one that offers the highest security. Since you will be storing your funds on the platform, trading crypto, or communicating with other buyers or traders you need to be sure that the exchange keeps your funds, account and information safe from any kind of threat or failure.

Read: Tips to Navigate Through Crypto Bear Market

Some of the most popular and well-developed exchanges in the world make use of cutting-edge security protocols that offer utmost security to their users.

Avoid Using Excessive Leverage

A vast audience is interested in trading with leverage because it allows traders to borrow funds from brokers and open bigger trading positions. However, bigger trading positions do not necessarily mean bigger profits as it also comes with bigger risks.

As a margin trader, if you use too much leverage your trades might not have the opportunity to catch a breath, which could lead to force liquidation where you lose all your funds.

Therefore, one should avoid using excessive leverage. If a platform offers up to 100x leverage, then traders can lose their gains if there is even a 1% move against their position. This is why a more efficient approach is to use less leverage.

Always Have an Exit Strategy

Crypto traders should avoid trading unless they have an exit strategy in mind. Traders can have a less stressful experience of trading crypto if they begin by identifying support and resistance levels on the charts. These levels can help them plan their trades and leave enough room for them to plan an exit strategy.

Read: Everything to Know about Sideways Markets

Look at Multiple Timeframes

Crypto traders often make the mistake of only analyzing a particular timeframe and in the process forget to look at the bigger picture. To ensure that the trades have a higher rate of success and are less risky, one needs to take a look at the overall market trend by considering several timeframes.

Experienced traders often begin their trading journey by first analyzing the bigger timeframes. They then switch to smaller timeframes and filter the market signals.

Using multiple timeframes instead of just one also highlights the scenarios where the chances of getting potential profits are higher than the risks they may face.

Form a Trading Plan

The strategy to form a trading plan is in correspondence to the tip mentioned above about having an exit strategy in mind. Every trader, experienced and inexperienced alike, should always have a trading plan before they begin.

This is especially important to work on if traders are trading in highly unpredictable market conditions. Having a proper plan can help them improve trading consistency and manage risks more efficiently. This can eventually provide them with the opportunity to reach some profitability.

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One should map out the following aspects while forming a trading plan:

  • Entry and exit indicators
  • Amount that will be traded
  • Stop-loss placements
  • Trading strategy used

Trading crypto without having a good trading plan is one of the most common mistakes committed by new traders.

Place Stop-loss Orders

Placing stop-loss orders is a part of having a trading plan, as mentioned above. This is one of the most common methods used by traders to minimize their risks and losses.

A stop-loss order minimizes the loss one may face on an investment. This is done when the investors specify a price limit and if the price of the asset reaches that limit the asset is moved.

Let’s consider an example to further understand the concept.

Let us suppose that as a trader you purchase an asset at $480 and you set up the stop-loss order at $350 to minimize the loss if the transaction does not go well. Now, if the price of the asset drops below $350, the stop-loss order will be triggered and the exchange will sell the asset at the current market price. The price the asset is sold at can be $350 or lower, depending on the market conditions at the time.

Specify your Trading Style

Professional traders usually have a trading style or strategy that they follow while trading crypto assets. Not all market conditions may be suitable for the trading style or strategy one has specified. For example, strong market trends are more suitable for swing traders to operate while scalping is a more suited strategy for when the markets are stable.

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Therefore, to avoid and manage the risks one needs to analyze which trading style is best for them and identify the right market conditions.

Key Takeaways!

Every crypto investor and trader needs to be familiar with what risk management is about and what are some rules they should always keep in mind to have a safer and better experience in the crypto space. The more information one has about buying or trading crypto, the easier it can be for one to establish what works for them and what doesn’t. The information and tips regarding risk management mentioned above can substantially improve the kind of experience one can have while trading crypto.

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