What is Risk Management in Cryptocurrency Trading

Currently the crypto market is growing insanely. The start of 2021 has proved it. As per CoinMarketCap, the cryptocurrency market total capitalization exceeded $1.36 trillion on June 9th 2021. Just for the sake of comparison, in March 2020, the market capitalization was evaluated only at 160 billion.

As the market is constantly growing, various people overlook that crypto trading is not only regarding profits, but even regarding risks. And if you don’t desire to exhaust your deposit on the first day, you have got to maintain crypto risk management regulation in mind. The correct strategy will assist you to gain a huge profit and diminish the risk of possible losses.

Risk is the probability of losing invested funds in crypto trading. Thus, risk management is the skill to speculate and manage possible losses from a failed transaction.

Why is risk management so important? 

Let’s understand this with some simple examples. You were determined to invest in cryptocurrencies and purchased Ripple, a comparatively strong and steady project, for your complete deposit.

But unforeseen things happen that are known as cryptocurrency trading risks when you most unlikely expect them to happen (sarcastically) — XRP dropped. And this dip is by as much as 50%. Incidentally, these are not theoretical numbers. Just go through the Ripple’s chart for the last year and notice the constant ups and downs.

In a nutshell, you can lose 50% of your deposit merely by executing a single deal. Certainly, this example is very dramatic. Even fresher traders seldom make such evident mistakes.

But the heart of the matter remains the same: if you are not considering crypto risk management services and are trading automatically, you will surely be losing money.

How to prevent losses and trade safely

1. Don’t put all your eggs in one basket. 

That’s the basic rule that every crypto trader must follow- never invest all of your money on one crypto because if it dips by 50% then you will be losing half of your invested money. So what can be done? Consider crypto trading risk management. So if you supposingly had ten assets and Ripple was only 10% of your complete deposit, then the loss that you bear will be significantly less. Thus, never take for granted the risk diversification! Always examine the market and invest in diverse cryptocurrencies.

2. Evaluate the size of the trade. 

Many times traders are influenced by emotions rather than logic or severe calculations. There is also a special term that determines this phenomenon. It’s popularly known as FOMO, or fear of missing out.

Motivated by the hype, fresher traders act carelessly, investing 30-40% of their deposit in a deal, which can result in severe losses when the deal is a failure. Thus, remember regarding the 6% rule and the 2% rule.

The only option is that you must open a position with no longer than 2% of your complete deposit. Some also suggest investing not more than one percent of the deposit. By utilizing this strategy, you will not drain your entire deposit.

The 6% rule states that if you continue losing money in crypto trading and can’t control the series of failed trades, you must stop trading if you forfeit more than 6% of your deposit. In this instance, it is suggested to take a trading break for 1.5–2 weeks, so that you can recover mentally and stop making rash decisions in a rash.

This precept is closely associated with the limit of capital loss. Make sure that the complete risks for complete orders do not exceed 25%, when you enter a position.

This offers an assurance that if every trade of yours turns out to be unprofitable, still you will have a minimum 75% of the deposit.

3. Define transaction profitability. 

Don’t forget that not every trade will be profitable. Also the professional traders sometimes lose money. It is a part of trading, you only have to accept it and follow crypto trading risk management strategies that can save you from failing. 

Remember to consider risk to reward ratio crypto, as this will help you to make a profitable crypto trading plan. 

How can TokyoTechie Help you in this process?  

TokyoTechie has built derivatives for hedge funds, miners and exchanges who face regularly difficult decisions on how to handle cryptocurrency risk management.

  • Elude opposed unwanted market swings
  • Elude opposed rising operational costs
  • Secure your organizations opposed possible losses
  • Prospective risks are tradable via derivatives
  • Huge level of expertise and personalization