Most crypto traders are eager to start trading and start making money, but they don't think about the size of their account or how to manage their money.
So, it's common for new traders to gamble, hoping to hit the jackpot, and not pay much attention to habits that lead to consistency.
If that sounds like you, it's time to look at some risk management techniques that, if used correctly, will keep you safe and help you stay in the market without blowing your account.
There is no doubt that bad things will happen when you trade crypto. By "negative events," we mean trades that don't go the way you want them to, price spikes that don't make sense, mistakes, and many other bad things.
Risk is a normal part of trading, and every person who trades crypto does so. Because they use leverage so often, traders in crypto futures tend to take more risks. If you don't use good risk management techniques, your trading balance will suffer, and you could even lose all of your capital.
Risk management practices show how you plan to deal with risks when you trade. They protect you from the bad things that could happen with your trades and help you keep your losses under control.
When the right crypto trading strategies are in place, the rules will not only keep you safe, but they will also help you get what you want.
Here are some ways to deal with risk that you should use in your trades.
1. Have a decent plan for trading
As a trader, one of the worst mistakes you can make is to start trading based on your instincts. We can't say that you can't get some good results this way, but it's just luck and nothing else. To manage your risks and get consistent results, you need a good plan.
Your trading plan is how you plan to do business. It's a system you've made up based on your market experience to give you the protection and results you want. Your trading plan should tell you when to open trades, when to close trades, how much risk you should take per trade, your risk-to-reward ratio, and more. Having a plan for all of these things makes trading easier and helps you handle your money well.
2. Don't Risk More Than You Can Lose
This is an important part of trading that people often forget about because they think nothing bad can happen to them and they have everything under control.
Why should you follow this rule? That's the question. Because you can lose your money, to put it simply. Also, trading with money you can't afford to lose will put you under pressure and stress, which can make it harder to make good decisions and cause you to make more mistakes.
The cryptocurrency market is volatile, so you should only trade a small amount of your extra cash. It hurts to lose money, and it hurts even more when the money was meant for something else. Because of this, you need to be able to spend your trading capital.
3. Scale Your Positions
Position sizing is based on the idea that you should keep track of how much you risk on each trade. You shouldn't trade with all of your money at once. Successful traders usually only risk a certain amount of their capital on each trade.
Some experts in trading say that traders, especially those who are just starting out, shouldn't risk more than 1% of their account balance on a single trade. This will help you limit your risk and keep your trading capital under control. Some traders consistently risk 2% per trade, and some risk 3% per trade.
Some people also think that no matter how many opportunities they see, they shouldn't have more than 5% of their capital in open trades.
The market has price changes that people don't expect. If you take on more risk than you can handle, these swings could cause you to panic and make you do things that aren't smart.
4. Minimize Leverage Use
Leverage lets you trade with money that you have borrowed. Because of this, your profits and losses can both be bigger. This makes it even more important to know how leverage works, how it affects your trading results, and how to best handle it.
Many futures traders want to use a lot of leverage so they can make a lot of money. But they forget that even a small mistake can cause them to lose a lot of money.
5. Determine Your Risk-to-Reward Ratio
The risk-to-reward ratio is the amount of risk compared to the amount of money that could be made from a trade. Before making a trade, you should look at the risk-to-reward ratio. If you can compare the possible outcome to the risk, you are more likely to choose trades that have a high chance of working out.
6. Use Stop Loss Order
With the stop loss order, you can choose when to get out of the market. It limits how much you lose when a trade doesn't go the way you thought it would. At some point, you will lose money, and there's nothing you can do about it. Use a stop loss order every time you trade to keep your losses in check.
 Related Topic: What Is Risk Management? |
Some people think they don't need a stop loss because they already know when to get out of the market. But they forget or don't realize that the market is full of surprises and that they could easily lose focus. Also, if you don't have a stop loss order, it's hard to know ahead of time how much you'll lose in a bad trade.
Stop losses make sure you don't get out of trades too soon and miss out on possible profits. They also keep you from trading based on how you feel or giving in to cognitive biases that can make you make bad decisions.
7. Maintain Profit With Take Profit
A take profit works in a similar way to a stop loss, but it is used to make a profit instead of stopping a loss. When the price reaches a certain point, the tool is set up to make a profit.
Having a clear idea of how much you want to make from a trade helps you figure out how much risk you should take. It will also help you be more disciplined when you trade.
8. Realistic Expectations
The best way to deal with risks is to set goals that are reasonable. You can't make a 40% profit every month without putting a lot of your money at risk. If you have such a goal, you will always trade too much or use too much leverage, which could cause you to lose a lot of money. Setting more realistic goals will help you keep your greed, fear, and hope in check.
Risk management is a very important part of trading, and new traders or traders who are having trouble should take it very seriously. Even though they may seem simple, not having them in place can make it hard for you to trade.
The difference between traders who do well and those who don't isn't always how complicated their trading strategies are. Most successful traders are simple enough that they can stick to their trading plans and have set up risk management procedures that they always follow.
