In this article, we will consider the basic rules of cryptocurrency risk management, and also figure out how to control risks during trading.
What Risk Management is all about?
To perform trading on the modern market it is necessary to be prepared for possible force majeure situations and circumstances. Competent methods of risk management will help minimize losses and not miss a profit, even in an emergency. Therefore, competent risk management in the cryptocurrency sector is at a premium. So what are the risks and what are the methods of their "taming"?The following is a brief description regarding the types of risks that we often face while trading:
- General market risk - the risk of adverse changes in the value of an asset;
- Credit risk - the risk of default on payment obligations;
- Liquidity risk - the risk of the inability to convert the entire position in fiat currency (or its equivalents) at the best prices;
- Operational risk - the risk of a collision with the inability to complete transactions or deposit/withdraw assets.
There are a huge number of different classifications of risks, depending on their accounting and management in various economic fields. All of them affect the operation and stability of the cryptocurrency market and its participants. Proper management of financial assets can be ensured by following the basic rules for trading on the exchange:
- Allocate only the amount of funds that you can lose without undermining your financial situation;
- Divide your funds on the cryptocurrency exchange into several parts and conduct transactions separately;
- Track changes in the market, conduct technical analysis, stay tuned. Analytics is an important tool that must be used in trading;
- Buy when there is a bearish market and sell after a prolonged period of market growth;
- Exclude greed and mercantile interests. Do not use the exchange as the sole source of your income;
- Choose the right psychological moment to trade on the cryptocurrency exchange. Do not panic about several consecutive losing trades.
A sound trading strategy should provide a clear set of possible actions to prevent risks. In practice, this could be as simple as setting Stop-Loss or Take-Profit orders. One must consider all the nuances and tools that an exchange provides you. Often, newcomers may lose sight of the opportunity or not clarify the calculation of the fees that accompany the trade. These factors should also be considered when managing risks.
Basic Risk Management Techniques
- Short-term trading. The volatility of the cryptocurrency market plays into the hands due to price fluctuations. Traders use this trading strategy to make a profit in a short time. The time duration between entry and exit is within a range of a few days to a few weeks.
- Long-term trading. Traders use historical data to make long-term trading strategy decisions. In this case, they hold on to a position for an extended period and rely on fundamental analysis.
- Fundamental analysis. This is a challenging analysis we had previously spoken about. Here, traders rely on a thorough study of the characteristics of each particular asset and what is behind it.
- Technical analysis. Traders rely on the previous price and volume data through analytical technologies. You can find more information here.
Closing Remarks
The risk management process is aimed at assessing the risk/profit ratio so that in the end it would be possible to prioritize in order to derive the greatest advantage. It is important to understand that not in all cases risks can be completely avoided. That is why your strategic thinking will allow you to face even the most inevitable risks most adequately. Such a skill can be developed only due to a systematic study of the market situation and the specificity of trading.Now you have learned a lot about trading patterns and tools, you can start trading on KickEX to implement the new insights efficiently!
