The crypto sector and therefore risk management in crypto has seen institutional and individual traders turn their attention to this space in the recent past. However, while the crypto sector is rapidly gaining popularity, cryptocurrency trading does come with certain dangers.
As a result, understanding risk management is critical. It will not only help safeguard your assets but will also assist you in identifying the dangers you accept while trading your cash in the cryptocurrency market.
Losses can be reduced through risk management. It can also assist in safeguarding traders’ accounts from losing all of their money. When traders lose money, they expose themselves to danger. Traders can just make money in the market if the risk is appropriately controlled.
Plan your trades for proper risk management in crypto
To begin, ensure that your crypto broker is appropriate for frequent trading. Some brokers cater to consumers who only trade regularly. They demand hefty fees and do not provide active traders with the necessary analytical tools.
Stop-loss (S/L) and take-profit (T/P) levels are two essential tools for traders to prepare ahead of time and have proper risk management in crypto. Successful traders understand how much they are willing to spend and how much they are ready to sell. They may then compare the returns to the likelihood that the crypto asset will go the price level they put into their stop-loss or take-profit orders. They will execute the order if the adjusted return is high enough or the price level has been reached.
In contrast, unsuccessful traders frequently start a deal without knowing whether they sell at a profit or a loss. Emotions begin to take over and drive their transactions, just as they do for gamblers on a lucky—or unlucky—streak. Failures frequently compel people to hang on in the goal of recouping their losses, while winnings might inspire traders to keep on in the hope of making even more profits.
Establishing Stop-Loss and Take-Profit Levels on Crypto exchanges
A stop-loss point would be the price at which any trader will sell a crypto asset and incur a loss or reduced profit on an open position. When a trade does not go according to planning, this is common. For example, traders frequently sell as quickly as feasible when an asset falls below a critical support level.
On the other hand, the take-profit point is the price at which the trader would sell a crypto asset for a profit. For example, if a coin reaches a critical resistance level following a strong upward run, traders may want to sell before the asset enters a period of consolidation.
Consider looking at the 1% Rule
Many crypto day traders use the one-percent rule. Essentially, this rule will state that you should never invest more than 1% of your cash or trading account in a single position. So, if you have about $10,000 in your trading account, your stake in any particular asset should not exceed $100.
This approach is popular among traders with less than $100,000 in their accounts; some even go as high as the 2% if they can afford it. Many traders who have more significant amounts in their accounts may want to use a smaller proportion because the position grows in proportion to the amount of your account.
Diversify your trades
You are making the most of your trading involves never placing all of your eggs in one basket. If you invest a large amount of your portfolio into one position or one instrument, you’re risking for a significant loss. So keep in mind to diversify your assets across different sectors, market capitalizations, asset classes and geographic location. This not only helps you to control the risk, but it also offers up new options.
You may also find yourself in such a position where you need to hedge your bets. Through options, you may adopt the opposing stance, which can assist defend your position. When trade activity has subsided, unwind the hedge.
Finding the right stop-loss and take-profit levels in risk management in crypto
Technical analysis is commonly used to set stop-loss and take-profit levels as a tool in risk management in crypto, but fundamental analysis may also play a significant part in timing. For example, if any trader is holding a coin ahead of key news events, they may wish to sell that before the news hits the market if expectations have gotten too high, regardless of whether the take-profit price has been met.
Moving averages are the most often used method for establishing these points since they are simple to compute and extensively monitored by the market. The 5-, 9-, 20-, 50-, 100-, and 200-day moving averages are critical moving averages.
These are best established by applying them to a crypto chart and evaluating if the crypto asset price has previously reacted to them as a support or resistance level.
Another excellent area to set stop-loss or take-profit levels is on support or resistance trend lines. These can be created by linking prior highs or lows that happened on large, above-average volumes. As with moving averages, the key is finding the levels at which the price reacts to the trend lines and, of course, on significant volume.
Estimating Expected Return
Setting stop-loss and take-profit levels are also required to compute the projected return. The significance of this calculation cannot be emphasized since it requires traders to think through and analyze their trades. It also provides a systematic method for comparing numerous transactions and selecting only the most lucrative ones.
This formula can be used to calculate this:
[(Gain Probability) x (Take Profit Percentage Gain)] + [(Loss Probability) x (Stop-Loss Percentage Loss)]
This computation yields a projected return for the active trader, which they will compare to other possibilities to choose which stocks to trade.
The Decisive point
Before entering or exiting any position, traders should always know when to enter or quit it and stick to that game plan. By employing efficient stop losses, a trader may reduce risk and the number of times a trade is terminated unnecessarily. Finally, organize your combat strategy ahead of time and you are one step further on the journey of optimizing risk management in crypto.