By Nathan Ferguson
Trading minds are blessings. Psychological factor plays a significant role in your success in the crypto trading market.
Cold-blooded decisions are mandatory to manage your trades effectively and make them progressive. To manage emotional discipline, refined trades, and risk management, one must follow some rules as they help make things manageable and make trading a profitable experience.
In cryptocurrency trading, the risk is an indication of loss or an adverse event in trading. Cryptocurrency trading involves high-risk factors as its outcome can be very unexpected. Let’s briefly review the types of risks associated with cryptocurrency trading.
Kinds of Risks
As the crypto market is multi-dimensional, it has a long list of associated risks, including financial, social, and psychological risks. Let’s have a deeper look into the significant risks.
- Credit Risk
This kind of risk involves crypto projects, and the primary cause is the parties behind them. When the parties fail to accomplish their duties, the tasks become the target of theft and fraudulent activities. The hacking of different coin systems, such as the Binance hacking in 2018, can be considered an example, and it has resulted in a loss of $40 million.
- Legal Risk
When something happens in cryptocurrency against the rules and regulations of your jurisdiction, it becomes a legal risk. The most common example is a ban on using and trading of cryptocurrency. Such restrictions are mostly implemented when a probability or a threat of money laundering exists. So it’ll be pretty wise to check the legal status of crypto in your country to avoid losses.
- Liquidity Risk
Sometimes traders cannot convert their entire crypto asset into fiat money which they utilize in their routine life. This condition lies under liquidity risk. It will be helpful if the traders check and analyze the liquidity level of their favorite coin.
- Market Risk
Volatility of crypto market is not hidden from anyone, here prices move up and down within seconds. If a trader expects a rise in any cryptocurrency, there is a significant chance that the price will fall and cause investors to lose.
- Operational Risk
The risk related to operations such as trading, fund deposits, withdrawal requests, and funds transfers is included in operational risks. There could be many reasons but it happens in the market. The reliable project teams keep these operations smoothly working and reduce risk.
Some Rules to Help Out in the Risk Management
Hereunder are some fundamental and significant rules to enjoy profitably and relaxing cryptocurrency trading.
- Must Have a Trading Plan
A trading plan is significant for profitable trading. It guides like a map and enables the traders to identify and manage the risk factors in trading. A plan could be a set of rules that assists in achieving the set goals. By having a plan, one can quickly implement the strategies and make money in trading.
A plan keeps the trader disciplined and helps in avoiding the gut decision. In this way, it reduces the mistake chances. Every trading plan is not suitable for everyone because of the individuality of traders.
So always focus on the plan that matches your skills and personality traits. First, judge yourself, identify your strengths and weaknesses, and consider your trading style, ability to bear the risk and psychology.
Trading plans should always be realistic so that you can achieve your tangible trading goals and manage the included risks according to the ground facts. A practical and scalable trading plan contains the following essentials.
The position Magnitude
Patience level
A tangible trading goal
- Calculate the Position Size
Whenever traders enter the market, they open a position per their trading amounts and goals. Newbies often commit big mistakes by having big open positions and avoiding the stop loss feature. As a result, they suffer huge losses within a short time. Position magnitude is highly significant when discussing returns on the crypto portfolio. Traders can implement several methods to calculate the position size that helps to decide the market entry point while significantly reducing the risk factor.
Trade size is commonly calculated using a fixed percentage of your total trading capacity. Using the 1% is a piece of good advice. For instance, if you have $5000 available for trading, the trade should not exceed $50. For a good start, it is the best. However, when your portfolio becomes grownup, you can go for taking a risk on a smaller amount.
Secondly, the traders can specify a fixed amount of fiat currency for every trade or use a set amount they can bear to lose if the market moves against them. The golden rule for attaining maximum safety with opening a position is that place the first order as the largest one and progressively reduce the investment in the upcoming entry points in any trend. It helps manage a safe investment while managing the risk of losing everything.
- Select Tangible Take Profit Targets
The main target of trading is making money, done mainly by buying at a low price and selling at a higher price than the entry price. The key factor is selling the asset at the right time, not too early, not too late. If someone misses the right moment of sale, the price again falls, and there is a positive loss in trade.
Take profit is the feature that enables a trader to set a profit limit formed after analyzing the market. For example, when you purchase a crypto coin and aim to sell it to collect profit, you must have an idea up to which price you want to sell it or how much profit percentage is in your mind.
Setting up a tangible profit target enables the traders to make the right decisions at the right time. If someone doesn’t set a take profit level, they can miss out on the highest price level for selling because they are looking for a further price increase, and the price falls unexpectedly. Setting profit goals is essential for a profitable trade, and traders can use numerous market indicators to estimate the expected high price. It helps them establish a realistic target and finalize the trade when a set high is reached. It ensures profit in trade and reduces the risk in a trade.
How to set a profit-taking target
In the trading world, different indicators are used to analyze the market and trends. The best time for making the best profit is when a trend shows signs of reversal. Market indicators like MA (Moving Average), RSI, volume, or candlesticks help identify the trend reversals and allow to set a take profit target.
For every trade, profit targets may differ due to many factors such as trade type, implemented strategy, etc. For example, the take profit target of a day trader will be different than the take profit target of a swing trader because a day trader tries to finalize all the deals on the same day and a swing trader looks for a larger time frame.
Similarly, trading strategies also play an essential role in setting up a take-profit target. Fibonacci lines are drawn from current low prices to top prices, showing multiple extension levels and indicating the expected reach of price.
Support and resistance levels also can help in setting up a take-profit target. Buying an asset at the support level and selling it at the resistance level secures a profit for you. This strategy is derived from the stock market and successfully implemented in crypto trading, and it remains effective when prices move between support and resistance price varieties. Moving Averages are good at tracking the price of an asset over a long period and help to identify the direction of any trend. It also indicates the take profit points. Suppose the current price is below the moving average, then rises and returns; it indicates the selling time, and wise traders successfully catch it.
- Don’t Forget to Set Stop Loss
Stop loss orders play a significant role in the risk management of crypto trading. As everyone knows, the crypto market is highly volatile, and prices rise and fall instantly. Expert traders use stop loss orders to avoid out of the blue and dramatic consequences of price fluctuation.
Using a stop loss order enables the traders to deal with quick market moves and save the significant positions to be the big losses. Professionals consider the stop loss order an effective risk management tool. It can be defined as a price at which the traders agree to accept the loss and sell their crypto assets. Excessively positive expectations regarding price reversals when they are actually diving deeper can be managed by decreasing losses even if they are smaller.
What to do to set a stop loss order?
For setting up a stop loss order, the trader has to decide the limit up to which he/she can bear the loss. It is elaborated in terms of the percentage of your initial investment in any crypto coin. For instance, it can be 5%, 7%, or even 10% of your initial crypto investment. It entirely depends upon the risk tolerance of the traders.
The point to remember is that position size and stop loss go side by side. You can say these are inversely proportional to each other. In case you are managing a big position, keep the stop loss tight, and if you enhance your loss tolerance and increase the stop loss limit, then reduce the investment size and manage to avoid a big loss in case the market moves against you.
For example, if a trader has bought a crypto asset using a DCA strategy, then it is good to set a stop loss limit below the average price to reduce the risk of loss. People often say that traders who are not using stop loss often become investors, and this is true somehow. Stop loss is an essential tool to manage easy learning of crypto trading without any losses.
- Don’t put all the eggs in one basket
Vigilance is one of the critical requirements for crypto trading and investment. Always keep an eye on the market conditions and moves to make wise decisions. Do not invest all your money in a single cryptocurrency because if that coin collapse, all your investment will turn into ashes. If it swiftly drops to 50% or more, it will cause a considerable loss.
So investing in more than one asset will be pretty cool. Because if any of your assets drop the value, the other assets might be making a profit, and your loss will be reduced to a bearable level.
For example, if you invest $1000 in five crypto coins, and one of them drops up to 50%, Your loss will be a minor percentage of your entire investment. So, whenever you decide to enter the crypto market, start with a little investment and invest in more than one crypto asset.
- Follow the 6% rule & 2% rule
When a new trader joins the crypto trading squad, he becomes inspired by the profit hypes and blindly invests enormous amounts in the market. Mainly this approach results in huge losses because of the highly volatile nature of the crypto market. Investing 30%-40% of your assets all of a sudden in one deal is not a wise decision. Because the deal remains unsuccessful, it will cause huge losses.
For all newbies in crypto trading, the 6% rule and 2% rule are perfect options. According to the 2% rule, a trader should open a position with only 2% of his full deposit, or this may be as minimum as up to 1% to reduce the risk of loss if the market moves in the opposite direction. This method keeps the traders safe against quick, complete drainage.
The 6% rule describes the situations when traders encounter a series of unsuccessful trades, and it tells the right way in this condition to avoid complete loss. According to this rule, the traders should stop trading if they bear a loss of more than 6% of their whole deposit. They are advised to take a break and refresh for new trades through wise decisions.
A general analysis is that your total losses should not exceed 25% of your entire deposit. It will keep you safe, and you will have almost 75% of your deposit even if you have encountered continuously unprofitable trades.
- Compare Risk/Reward Ratio
Risk/reward ratio analysis remains a good indicator for executing a successful and profitable trade. By comparing this ratio, the traders can determine the actual risk level associated with the potential gains. In cryptocurrency trading, a riskier position can potentially be a more profitable trade. Its good understanding enables the trader to decide when to start a trade and in what conditions the trade will be unbeneficial.
The traders can use the following formula is to calculate the risk/reward ratio.
R = (Target Price –
entry Price) / (Entry Price – Stop Loss)
For Example, if entry price is $12,500, Stop Loss is $11,500 and target price is $14,000, the risk / rward ratio will be as follows:
R = (14.000 – 12,500) / (12,500 – 11,500)
= 1.5 or 1:1.5
This ratio is considered suitable for trading. Traders can define higher ratios, but trading at 1:1 is not advised as it’ll be only a labor of love or mostly ends in loss.
Some Persuasive Strategies
If someone is interested in joining cryptocurrency trading, they must know the involved risks, their management, and successful strategies to win the situation. Let’s consider some winning strategies.
- Admit Failures
Risk is an essential part of cryptocurrency trading that can’t be eliminated and can only be managed. So, instead of running away from your failures, admit them and analyze them to avoid them in the future.
- Focus on the success rate
Don’t only focus on your failures but also look at your successful trades to get motivation instead of discouraging. Considering your success rate will cultivate a positive attitude in your trading performance.
- Take account of Fees
When they join cryptocurrency trading, many newbies have no idea of fees related to trading and other operations. You should consider the fee for trading, deposits, leverages, and withdrawals so you can design a plan to manage them.
- Scale up your losses
It refers to determining the total decrease in your initial deposits after going through a series of unprofitable trades. If your entire decrease exceeds the 6% of your initial deposit, you must think of stopping the trading and taking a break to return in a more energetic mood and passion.
Final Thoughts
Working through rules and managing risks is critical for effective and profitable crypto trading. Chasing the targets by following the set rules always ensures your success. Risk management rules help in controlling your trades and enhance your profits. The only way to manage the market volatility is by being disciplined and following a well-planned strategy. Emotional or gut decisions are the major causes of losses in the crypto market. Risk management rules and strategies assist in avoiding them and keeping secure in a volatile market while making good profits.