Crypto trading presents an exciting opportunity with significant rewards, yet it’s rife with challenges. Mastering risk management is a pivotal factor in achieving success in this field. A stop-loss order, determining a price level to exit a trade and curtail losses, is an indispensable tool. It’s crucial to set these orders at a level aligned with your risk tolerance and trading approach, providing an exit plan if the market turns adverse.
What is Risk management?
Managing the risk of trades in crypto markets is key to building effective trading strategies. A disciplined approach to risk management will help a trader analyze the risk involved in trade decisions and thus minimize the chances of loss while maximizing profits, thereby protecting capital.
There is a multitude of strategies that fall under the realm of risk management for crypto traders: how much to trade without risking capital, where to stop a trade when a trade goes against you and restrict your losses, diversification across the system and portfolio when trading with the intention of not losing, conducting comprehensive fundamental and technical analyses, and last but not least, having a risk-reward ratio so that you don’t over position a trading lot or increase leverage beyond what the market price can sustain.
What is the Stop Loss Order?
Now let’s talk about stop-loss orders. They are one of the core risk-management tools that all traders can use. A stop-loss order, sometimes called a stop loss, is an order given to an exchange or trading app to sell or buy a crypto token when it hits the specified price. It is a way of putting a cap on a potential loss on a trade. Your stop-loss order is usually set after you have bought or sold a token to determine the maximum loss you are ready to accept.
For this reason, a trader will need to identify in advance a price at which he wants to exit the position (such as, say, a 10 per cent or 20 per cent cut to the entry price from day one, or at a specific price point, or below a technical indicator such as a moving average or the support level). This price level, below which the trader doesn’t want to hold the position, is what we call a stop-loss.
How to Setup Stop-Loss Levels?
Various stop-loss strategies are commonly used in trading:
- Price Percentage-Based: This is where you choose how much you’re willing to lose as a stop-loss X% of your entry price. For example, if a user purchased BTC at $40,000, they might have a 5 per cent stop loss at $38,000, and if it was a pretty risky trade, they might want the loss to be only 3 per cent.
- Per cent of Capital: Some traders decide on an absolute percentage of their capital that would accept a loss on a trade and then establish a stop-loss to derive the number of units to purchase.
- Stop-loss at fixed Price: Set a stop loss at the price established by a technical indicator, such as a moving average or a support level.
- Moving Average: Traders would place a stop loss below a short- or medium-term moving average. If the token price falls below the moving average, this could signal a turndown in the short-term trend and give the trader a reason to exit.
- Support Level: This strategy involves setting a stop-loss just below a significant support level on the chart. Support levels are where prices historically bounce back after hitting a low. Breaching support might signal a trend reversal, prompting traders to exit.
The crucial aspect is identifying a stop-loss level aligned with the maximum loss the trader is prepared to accept. This determination can vary based on risk tolerance, position size, and other factors. For example, conservative traders might set tighter stops on larger positions due to the potential for larger losses compared to smaller positions.
Risk management techniques and strategies
These strategies for risk management, if executed well, will help crypto traders limit losses and improve their overall trading results. These are some of the most popular strategies for crypto trading risk management:
Choose a reliable crypto trading platform. Buying, selling, and holding crypto assets for the first time is a decisive first step on your crypto journey; choosing a reliable platform will be the foundation of your risk-management strategy in crypto trading. ZebPay is home to more than 6 million users. With features such as multi-stage security protocols, Futures trading on the Web, Instant buy-sell, CryptoPacks for Portfolio building etc. We have the needs of all crypto investors covered.
Diversify your crypto portfolio: Just as investors diversify their crypto portfolios, you can diversify multiple cryptos to reduce your risk exposure. Bitcoin and Ethereum are the foundation assets of the blockchain, but you can also diversify your crypto portfolio by investing in several promising projects with significant market capitalization. If a single asset is performing poorly, you can minimize its impact on your investment portfolio.
Psychological aspects of risk management
Psychological factors and emotions also contribute to significant behaviour in crypto trading (or any form of trading, for that matter). Greed, fear, overconfidence, and confirmation bias are commonly entrenched in investment decisions. People often judge prices incorrectly due to their emotions. Impulsive trading is caused by strong feelings of greed or fear, which result in poor decisions shortly after they are made. Confirmation bias leads to subconsciously positive judgments related to something if it supports a trader’s existing belief. It is very difficult (if not impossible) to independently assess prices and simultaneously confirm one’s previously held beliefs.
But you can confidently navigate the markets by identifying those risks in advance and implementing appropriate mitigation and practices, thereby keeping your trading disciplined and active for years to come.
Conclusion
Ultimately, learning to control your risk is not only a good idea but it’s essential to your success as a crypto trader. The extreme volatility of the crypto markets can, at the same time, give you large returns and leave you with crippling losses if you’re not careful. You can learn to navigate this volatile yet risky environment by investing in a variety of digital assets, controlling the size of your positions, adding stop losses to your trades, and reviewing your portfolio regularly.
Implementing stop losses can swiftly limit losses, while take-profit orders can secure gains. Traders commonly determine stop-loss levels based on price percentages or fixed prices, often guided by technical indicators. Utilizing these risk-management techniques can potentially enhance overall returns and reduce risks in various trading strategies. Although they demand discipline and continuous monitoring, these straightforward tools can make a substantial difference in your trading outcomes.
If you found this blog useful, share it with other like-minded crypto enthusiasts. Click on the button below to begin your crypto trading journey using ZebPay.
