When it comes to trading, there are several steps you can take in order to reduce your exposure to the market extremes of price volatility.
A combination of both technical and fundamental analysis can be used to determine the true worth of a company or asset, securing a greater chance of success with a particular investment while reducing your risk along the way.
But for that, you need a plan.
Mastering your emotions
Developing a successful risk management plan is paramount in minimizing unexpected outcomes, translating into an overall reduction in your losses.
A successful risk management plan should also run parallel to your crypto trading journal records, working in conjunction to curb poor trading behavior while simultaneously justifying your fundamental expectations.
Sometimes temptation leads to poor choices and it is no more on display than a market driven by fear and greed.
By reducing harmful or negative trading habits, one can hope to increase profit without putting too much on the table.
A key component of a successful risk management plan is determining what kind of trader you are and where your skills currently lie:
- “I usually break even” - When this occurs it could be a sign that your risk management is effective, however, you are also too risk averse and will fail to capitalise on anything substantial or you are barely able to cover trading fees.
- “I make a small profit” - When this occurs it could be a sign that your risk management is effective, however, it is also an indication that you aren’t letting your trades run. It is usually driven by emotionally charged decisions made in haste, such as closing a position too early because of what is known as “weak hands.”
- “I make a large profit” - When this occurs it is a sign that your risk management strategy is working well and that you have reached a pinnacle in risk aversion by applying trading sizes to the appropriate risk. It is usually an indication that you close positions at predetermined prices and let others run their course.
- "I usually lose" - When this occurs it could be a sign that you have limited understanding of market cycles, need to further your research on the asset class you are investing in and you tend to pick illiquid projects/coins/tokens.
From these personas you can draw a rough idea on where you currently sit in terms of your trading mentality. The idea is to identify what habits are forcing you to lose out and which habits are guiding you to profit.
Try to remain stoic and reasoned, removing emotion from the psychological aspect of trading while relying solely on the information in front of you such as the price, volume, news and trend.
Don't put all your eggs in one basket
No matter how tempting or promising a particular trade opportunity may appear it is never a good idea to place all of your worth on the line.
Generally, a spread of one particular type of asset class (as well as a generous mix of different asset classes within your portfolio) is an ample measure in reducing your exposure to larger price moves within a particular industry/market.
The volatility of the cryptocurrency market means that any trade, even a seemingly perfect trade, can collapse and result in a significant loss. Therefore, it is recommended that you start investing in 5 or more different coins.
Also remember to take advantage of an exchange’s stop-loss feature and use it to your benefit when you are away from trading manually such as times of rest or at work.
Time and again new traders fail to incorporate an adequate exit strategy, often arriving back at their computer to find their beloved basket of crypto have dropped 20 percent and a new trend has developed to the downside. This act not only reduces your risk but allows for greater control over your losses.
Finally, it can be tempting to use a buy and hold strategy where you invest in a coin and refuse to sell for an extended period of time. This passive approach is often tempting to new traders due to its simplicity and is often falsely associated with reducing one’s risk.
However, you’ll unlikely amount to any significant wins by playing it too safe, so dive in, take on the adequate risk and ensure you have a plan mapped out because trading crypto can be a fun and profitable endeavour when executed correctly.
Disclosure: The author holds no cryptocurrency assets at the time of writing.
See-saw image via Shutterstock
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.