Traders today can access vibrant, global crypto markets that run 24/7. But trading digital assets exposes them to industry-specific risks, like volatile price movement and exchange vulnerabilities. So let’s dive into what crypto trading risk management involves and discuss actionable ways you can manage risk using Quadency.
Risk management simply refers to the process of limiting potential losses by creating a plan to manage potential risks.Cryptocurrency markets involve specific risks traders should be aware of in order to optimize the possible outcomes.
Let’s take a look at some examples:
You have some money earmarked for trading crypto so you open up an exchange account to get started.
All is going well until a few weeks later when you receive an email from the exchange:
There was a hack and all deposits and withdrawals have been halted.
Your investment and any potential earnings are either gone to hackers, or locked up for an undetermined amount of time while the exchange investigates.
You’re new to crypto and you notice that everyone in your social media feed is talking about Dogecoin.
So you decide to buy some $DOGE.
In other words, you “FOMO in” by buying at peak hype and a high price because of your “fear of missing out”.
The very next day early holders sell and Dogecoin’s price crashes, leaving you with a 50% loss overnight.
In the above examples, investors could have lost their original capital and profits via exchange vulnerability or extreme volatility.
Below are some additional risks to watch out for:
Luckily, traders today have many options for managing these types of factors, so in the next section we provide some guidance for planning your risk management strategy.
Once the risks have been identified and measured, investors can start to plan for them.
With so many crypto assets circulating today and hype in trading groups and across social media, a good strategy needs to do backed by your own research on individual assets.
Has this influencer been paid to talk about this product?
Do real people actually care about this project?
Does this cryptocurrency have something would actually work and be useful?
Who's working on this product? Are they backed by anyone?
Check the on chain metrics as well as the charts, is it the right moment to buy or sell?
Having a defined strategy will help you remove emotion and FOMO, while lowering your risk exposure. The first step is to determine what type of trading strategy is right for you. Some prefer various day trading strategies, while some are geared towards going long in a bull market or shorting crypto in a bear market.
Most importantly, once you define your strategy, make a plan to stick with it!
Diversifying your portfolio is another method of mitigating risk and reducing the effects of volatility, while gaining exposure to potential return opportunities. This mainly involves never putting "all your eggs in one basket," and instead:
One way traders can easily and automatically adjust their portfolio allocations is by using tools like Quadency's Portfolio Rebalancer.
When it comes to entering a trade, one should always consider the 2% Rule: “Never allocate more than 2% of your available capital in one trade.” To calculate a trade position size, there are a few elements to take into account:
Here's the formula to calculate position size with an example:
position size = account size x account risk / invalidation point
position size = $10,000 x 0.02 (2%) / 0.05 (5%)
position size = $4,000
Learn how Quadency enables traders to proactively design and carry out an investment risk management plan to protect their digital assets.
One of the many reasons Quadency focuses on trading bots is to help investors take emotion out of the equation, while their bots do all the hard work. And there’s a bot for every investing strategy whether you plan to use technical analysis, scalping, or simply accumulating to HODL:
With Quadency’s unique blend of cross-platform portfolio management and easy-to-set-up automation, traders have a wealth of strategies to use for managing risk.
In order to determine the risk taken within a trade, you need first to define your exit point, and whether it end with a loss or a profit:
Carefully consider the size of your SL/TP using technical analysis. If the price change is too small it may trigger too soon and vice-versa.Setting up a Stop-Loss/Take Profit is easy with Quadency bots, including the Bollinger Bands and Smart Order bots.
Once your SL/TP are set, you can calculate the Risk-Reward Ratio (R/R) to help with risk management. As you can see in the visual below, calculating the RR is simple: Divide your Take Profit by your Stop-Loss; then, compare it to your usual win rate to see if a trade has a higher chance of profit.
With Quadency, it's easy to calculate your R/R when placing a manual trade. As you can see in the visual below, simply use the Stop & Target drawing tool to visualize your R/R.
As a crypto trader, having only one exchange or one wallet can be dangerous:
2 key ways to avoid a single point of failure:
One benefit of API trading that many investors may not realize is that when exchanges experience outages during trading peaks, their API trading systems are often still operational, allowing you avoid potential losses.
Crypto markets may seem complex at first. But the digital nature of crypto enables traders to easily set up automated risk management strategies via platforms like Quadency. First, learn the risks of trading digital assets and do your own research. Then choose your strategy and commit to taking action towards removing emotions from your investment decisions.
At Quadency, we’ve got a bot for that, and it’s free!
Quadency is a cryptocurrency portfolio management platform that aggregates digital asset exchanges into one easy-to-use interface for traders and investors of all skill levels. Users access simplified automated bot strategies and a 360 portfolio view with a free account.
Disclaimer: The content of this article is for general market education and commentary and are not intended to serve as financial, investment, or any other type of advice.