Risk management strategies

Risk management strategies

Contents of this article:

Trading is a risky way to make money on cryptocurrency, but one of the most profitable and effective. Avoiding risks by 100% and trading without losses is impossible, even experienced traders make mistakes, make incorrect forecasts, and as a result, they not only do not receive the expected profit, but also lose part of their capital. But risks can be managed by following the rules and strategies of risk management.

The concept of risk management strategy and tactics

In trading, risk is the probability of losing some of the capital invested in a trade. Risk management allows you to determine this probability, as well as control it, losing relatively small amounts in case of an unsuccessful transaction. The presence of a risk management strategy in trading is one of the prerequisites for entering the exchange and starting trading if the trader is not ready to lose capital uncontrollably.

Objectives of the risk management strategy:

  • Limit the risk of the transaction. The amount of risk for one trade is the difference between the value of the entry position and the stop loss level. The optimal amount of risk is 1.5-2%.

  • Limit risks to capital. The amount of risk of all transactions should not exceed 25% of the capital. Even if all positions are unprofitable, optimally, the trader should have less than 75% of the capital left.

  • Determine the profitability of the transaction. The ratio of income and risk should be 3:1. Following this rule will allow you to compensate for losses.

Basic rules applied in the risk management strategy

The first rule of a risk management strategy for a trader and an investor is that before starting trading or investing, you need to decide on the amount that can be safely lost in case of failure. A psychologically comfortable amount is approximately 10% of monthly income .

One of the basic rules can be formulated as follows: “Increased risk must bring high profit.” This means that if a trader takes high risks, while the potential profit from the transaction does not exceed the possible risk by three times, there is no point in such a transaction.

The next rule is investment diversification. It is necessary to balance the investment portfolio by distributing capital between assets with different capitalization, as well as between different trading floors if a trader or investor uses several exchanges.

The third important rule is a gradual entry into the market. If today you are ready to invest a large amount in crypto, you should not do it right away. Investing, like trading, needs to be learned. Gradually investing small amounts in a digital asset, you will learn how to choose promising tokens, diversify your portfolio and manage risks.

Summing up the above, we can say that the following rules do not apply in the risk management strategy:

  • risk a large amount for a small profit;

  • focus on one asset, investing in only one coin;

  • immediately invest all free money in the crypt.

Trader risk management strategies can be divided into three types: conservative, moderate and aggressive. If a trader chooses a conservative model, the amount of risk for one of his transactions should be kept within 0.6-1.5%. When using a moderate model, the risk per trade can be increased up to 3%. The aggressive model suggests that the risk per trade can be as high as 7%.

Failed risk management strategies

The high risks that are typical for trading on the stock exchange are dangerous for the deposit of beginners. Neglecting risk management strategies for trading , it is very easy to drain the deposit within a few days. To avoid losing money, avoid these mistakes:

  • emotional actions. Risk management is rational trading and risk management, there is no place in trading for the desire to recoup.

  • Aggressive trading. Those who invest 20% of their capital or more in one position run the risk of saying goodbye to the deposit.

  • Faith in position. It is better to close a losing position on time, losing a small amount, than to wait until the last moment and drain a decent part of the capital.

On course Crypto Crew we teach beginners how to invest effectively, choose the best trading strategies and manage risk. Go through training so that in a month you can confidently enter the exchange and make earnings on the crypt the main source of income!