One of the most crucial elements of successful trading is risk management. No matter how good you consider your trading strategy, you have to remember that nothing is guaranteed. Every trader will eventually take a hit from time to time and the only way to stay in the game for the long haul is to have an effective risk management strategy in place. This is of the utmost importance when you are trading an instrument as volatile as cryptocurrency. But, how do you manage your risks when you want to trade these digital currencies? Here are some of the top ways you can accomplish this:
Protect yourself from counterparty risk
There is no denying that some of the highest percentage gains have been seen in the cryptocurrency market, but you need to remember that they are not without their problems and there is a degree of counterparty risk involved when you are using an exchange. Crypto transactions are considered irreversible and expecting an exchange to protect your private keys is a recipe for disaster. There have been numerous incidents where exchanges have been hacked and money was lost. Crypto traders cannot fully eliminate counterparty risk, but it can be reduced significantly.
How? The key is to only trade with just 20% to 30% of your portfolio, research the exchange to ensure it has a good reputation, diversify your cryptocurrencies amongst several exchanges, and don’t leave your coins on the exchange if you don’t plan on trading actively.
Trade quality over quantity
Overtrading the market is a big mistake on the part of traders because they end up wasting a lot of time and money this way. Opting for quality over quantity is the best way to ensure effective trading. Your strategy may not be handy in all types of market situations. For instance, automated scalping is more effective when markets are stable, while swing trading gives the best results during strong trends. If you want to make quality trades, you need to decide what kind of trading style suits you, along with identifying the right market conditions.
Have an exit strategy
Mapping out your trades ahead of time is a smart move, as is identifying key resistance and support levels. You also need to know the risk and reward ratio and then set your targets accordingly for taking profits. Traders can either choose to scale out the long way to lock in profits, or they can add to their position during strong trends. You should also set stop orders for protecting yourself in case the markets are moving against you. Just bear in mind that stops are not always effective if the price moves too quickly, or slippage may lead to a bad fill.
Don’t use leverage excessively
Margin is often used by traders because it helps them in increasing the order size and also gives them flexibility in going long or short. With that said, you shouldn’t forget that using excessive leverage will not give your trades enough time to breathe and you can end up losing your whole principle amount if you are forced to liquidate. Some exchanges do tend to offer leverage as much as 100%, but your account can be destroyed if the market moves against you even by 1%. A saner approach to using leverage is by keeping it at x3. This helps you in increasing your gains and gives you enough room to exit a trade.
Don’t fall for hype
Last, but certainly not least, don’t fall for the hype. Fear of missing out, or loss, is the biggest enemy of a trader. If you become too greedy, you may end up purchasing tops. If you panic sells, you may end up doing so at the bottom of a dump. Half the battle is staying objective and managing your emotions and understanding that hype mostly occurs after the trend has already hit its peak.