Any business you decide to start will require a pre-made financial plan, technical plan as well as other strategic-organizational plans. The goal is to try to predict future outcomes and depending on whether they are positive or negative we can conclude whether our investment is worth the risk. In the same way, we need to enter the world of cryptocurrency trading.
Many view crypto trading as a game of chance, but many seriously want to dedicate themselves to crypto investments and make them the main source of their personal income. In that case, experts recommend ready entry into the crypto world and taking into account various parameters that can show whether we can expect more losses or gains in the future. Indeed, we cannot predict with certainty all the negative events that may happen, but we must expect them and be ready to react.
Risk management is an unavoidable aspect of cryptocurrency trading. Still, once traders start making big gains they start to ignore all the rules, which often results in losses. To prevent this from happening to you, we will try to help you by pointing out a few basic risk management strategies. But before that, let’s see what risks are possible.
One of the first risks you have to be prepared for and which you cannot fight is the legal risk. This implies certain regulatory changes prescribed by the state. One such change could be a ban on this type of trading in your country. There are many such examples in the world, and they are most common in American countries. The reasons that lead to such decisions of the state are different, and the most common are frauds.
Credit risks are encountered during the implementation of crypto projects. This may lead to non-compliance by the contracting parties. This non-compliance with the terms of the project is interpreted as fraud. Fraud and theft are the most common reasons why it is important to consider this risk.
Market risk arises from currency volatility, which davidicke.com points out as the biggest disadvantage of digital coins. No value of any cryptocurrency is perfectly stable and unchanging. On the contrary, it can change at any time and every day and there is nothing that can be done about it. The price of coins can vary, regardless of the wishes of market participants. Still, you can take that into account at the beginning and be ready for any changes and even some drastic ones.
The goal of all traders is to make as many coins as possible and as much profit as possible so that they can later convert it into fiat currency and spend it regularly. The problem occurs when it is not possible. The reasons for this can be different, depending on the laws of the countries in which you live as well as the laws of the crypto market to the current technical complications.
Operational risk is a possible situation in which a trader is for some reason prevented from trading his coins or depositing them.
Once you have considered all the risks that may pose a threat to you, it is time to develop a trading plan. Such a plan involves a set of tools and parameters that facilitate the adoption of the right risk management strategy. Well, thought out decisions can be a big step towards your success and making more profit.
Given the great instability of the crypto market, this is a great reason to establish good initial strategic decisions. This is the only way to avoid unpleasant surprises and succeed.
1. Stop Loss and Take Profit Strategies
The first of the three most prominent strategic methods among digital coin traders is Stop Loss and Take Profit. When trying to develop a plan in advance, start by setting boundaries. You need to know what your payment and sales limits are and how far you are willing to go, because only then will you know when to start and when to stop. Ignorance of these limits results in the impossibility of measuring the return concerning the invested funds. Once you realize that it is possible to achieve a high yield and that the risk is minimized, you can take further steps in the trade.
To minimize losses, it is necessary to set a limit or so-called Stop Loss. Special attention is required here because neither a border set too close nor too far will bring a good outcome. When it is too far, there is a higher risk of losses and when it is too close, there is a higher risk of going out of bounds quickly.
Take Profit on the other hand helps to predict when is the right time to sell.
2. Asset diversification Strategy
One of the basic rules in the crypto market is to never direct all funds to one place, or to one store. the sooner you realize this, while you are still at the beginning, the faster you will achieve the desired results. There are many examples when such a move seemed like a good idea, but in the end, it resulted in unwanted losses. Of course, there were cases when it turned out to be the best possible choice at the time, but they are rare and require a lot of experience.
The goal of diversification is to direct money to several different places to reduce the possibility of a bad outcome that you don’t want. When your digital money is only in one place, you can easily lose it if the situation in that place becomes complicated.
So, long-term financial planning is the key to a smart investment.
3. Reward vs Risk Strategy
This strategy is most often used to determine the amount of expected inflow depending on the initial risk taken. When deciding on big investment steps, you have the right to know what to expect and this is a good way to find out. In this case, the amount that could fall due to higher unexpected volatility is compared with the expected inflow.
Properly establishing a risk management strategy is a crucial initial step if you want your investment to be profitable. If you haven’t been sure how to predict this by now, hopefully, we’ve made it clearer now. Good luck!