The Top Coins > Blog > Cryptocurrency Education > Crypto Trading Risk Management
                                        Crypto Trading Risk Management

Crypto Trading Risk Management

11 Jul 2021
Reading Time: 8 minutes

Even with all the trading horror stories, you’re still wildly interested in getting the most out of your cryptocurrency investments. Finding the right platform is definitely the first step. IDXA Exchange is one of the best and most advanced cryptocurrency trading platforms. Its main attractions are the enhanced security and compliance with global KYC and AML standards. 

IDXA exchange has taken it a step further and introduced a rewards program for investors. If you were looking for a way to reduce your trading risks and make some money, the AMLC Staking Program is a step in the right direction. 

According to the rewards program, investors can gain up to 20% in rewards by simply holding AMLC tokens! Compared to the other trading risks that you’ll come across while investing, this rewards program seems like a safe investment. 

However, learning about trading risk management is integral to investing in cryptocurrency. So, here’s everything you need to know! 

What Is Crypto Trading?

In the simplest language, crypto trading involves the buying and selling of coins on an exchange such as the IDXA Exchange. First, investors will speculate the price movements of various coins through a CFD trading account. Then, according to their judgment, they will make strategic investments. 

While it is relatively straightforward in theory, the market is incredibly volatile. The volatility of the markets is the biggest trading risk. Investors need to be aware of the extreme risk they’re taking when investing in cryptocurrency. 

All investments are high-risk and speculative in nature. While the rewards can be incredibly high, it’s more often a huge loss you’ll encounter. In addition, since the markets are unregulated and volatile, multiple trading risks associated with crypto trading keep many investors away! 

Types Of Risks

If you follow cryptocurrency trading, then you've seen multiple investors fall prey to the trading risks. As a future or current investor, you'll need to know what risks you're taking and take the appropriate precautions against them. 

There are four main trading risks when it comes to crypto trading: 

Credit Risk 

This risk is associated mainly with crypto projects. It rises with the probability of parties in the crypto project failing to uphold their duties. It’s most often associated with theft and fraud cases. For example, when Binance was hacked in 2018 and lost $40 million, it was an example of credit risk. 

Legal Risk

Local and international laws can hurt your crypto investments. If a specific country bans trading or places unyielding restrictions on trading, then it can significantly increase your risk of losses. 

Liquidity Risk

There’s always a chance that you won’t be able to convert your money back into fiat currencies like USD and INR. Even if you’ve made an incredible amount of money, technology and other factors can affect your ability to cash in. 

Operational Risk

Unlike regulated trading, cryptocurrency operates unregulated, so there’s every chance of operations failing. There’s every chance you won’t be able to trade, deposit, or withdraw money from your trading wallet. 

How To Manage The Risks?

The best way to manage the risks in crypto trading is to have a strategy in place. Of course, every pro-investor has a strategy when investing. After all, investments require planning and a little luck to come to fruition. 

A basic conservative strategy has different rules and tricks on how to invest your money.

  • Only use 4% of your total investable income

  • Never spend more than 1% - 2% of the 4% on a single trade

  • Don’t make too many trades for long-term investments in a short period of time

The basic conservative investment strategy is simply looking to keep you and your investments safe. If you’re not overextending your income, diversifying your investments, and keeping backups, you’re better prepared to handle the losses. 

A big part of trade risk management in cryptocurrency involves planning for losses. The pros understand that they will be making losses and work to keep themselves afloat despite any major loss. 

Some other tips can help you manage the risks that come with crypto trading. 

  • Use strategies and not emotion

  • Don’t commit more money than you can lose

  • Don’t limit your options by trading too quickly

  • Don’t break your risk management rules based on emotion 

  • You’re investing, not gambling, so don’t stake everything you have on crypto

  • Have an exit plan

All-time Best Winning Risk Management Strategies

One of the best and most valuable strategies in crypto trading is what is known as position-sizing. It works on the principle of not placing all your eggs in one basket. 

Position sizing refers to the volume of a trade or a transaction. Determining the volume of the trade you're making involves understanding the amount of risk you're willing to take and the capital you are trading. 

You’ll also have to consider your stop-loss. This is an order that you can give which cuts losing trades. For example, if your entry price is $10,000 and the markets start to fall, your stop loss can be $9,000. It’s a necessary risk management tool that all investors should use. 

All-time Best Winning Risk Management Strategies

So, when determining position sizing, you’re going to use the formula: 

((Capital x Risk per trade) / (Entry price - Stop loss)) x Entry Price = amount you should invest 

Let’s take an example: 

Capital: $5,000

Risk per trade: 2%

Entry Price of Coin: $10,000

Stop Loss: $9,000

So, your equation would look like this: 

((5000 x 0.02) / (10,000 - 9000)) x 10,0000 = $1000

Your position sizing would be $1000 or 20% of your investable income! 

Final Words

While the trade risks associated with cryptocurrency can be intimidating and downright off-putting, there’s a chance of high reward. While there isn’t a Lambo waiting around the corner, you can make a significant amount of money with some rightly placed money. 

However, understanding the trading risks and their management is vital to succeeding. If you’re looking to invest like a pro, learning to manage risks like a pro is the first step!




Leave a Reply

Add comment

Latest Post
Related Posts