In the previous blog of our 9-part Navratri series, we detailed the methods to keep your Crypto secure. On the occasion of Day 6, let us explore the different ways in which you can mitigate risks by taking precautionary measures during trading and investing in the Crypto markets.
The measures to mitigate risks vary when you are investing and trading, although there could be an overlap. Risk mitigation is also a sign of courage as you will have to fight with your emotions and give the benefit of the doubt to math and logic.
Risk Mitigation in Trading
One of the cornerstones of effective trading is the use of stop loss and the courage to exit a trade when your emotions ask you to stay put. This is because a stop loss tells you the amount of risk you are willing to take for a certain profit. It also helps you to stay away from the screen and focus on other activities while the trades are running.
Stop loss explained
Let us understand stop loss through a very simple example. Suppose you bought a Crypto token which is worth INR 100 and you expect the price of the asset to move to INR 120 based on your technical analysis and inferences.
Now, there are two possibilities if the market moves in the opposite direction. 1) The market spirals downwards and does not return to the level at which you bought the asset 2) The market moves downwards and reverses. In both these scenarios you might see the value of your asset go down, and there is a certain extent to which you can tolerate this value reduction. That “extent” or “tolerance” is called stop loss. So, if you buy an asset for INR 100 and you are willing to see it go to INR 90 before you expect it to reach INR 120. Then INR 90 becomes the stop loss price. As a general practice, traders tend to trade with a risk-reward ratio of 2:1. Which means, you are willing to see an INR 10 loss before it turns into an INR 20 profit. However, this ratio is not standard and you must choose your stop loss based on your trading style and success rate.
Stop loss is critical because it ensures that your capital is not eroded due to market fluctuations. Capital preservation is key to trade successfully as opportunities are always available, and having sufficient capital when the opportunity arises is important.
Read more: Crypto Investing vs Crypto Trading
Risk Mitigation in Investing
In long-term crypto investing, mitigating risks involves several key strategies. Diversification is essential; rather than putting all your funds into a single crypto, spread your investments across multiple assets to reduce exposure to any one project’s vulnerabilities. Thorough research is paramount – delve into the technology, team, and adoption potential of your chosen crypto assets. This knowledge empowers you to make informed decisions and have confidence in your investments.
Long-term success in the crypto space often demands patience. Price volatility is common, but reacting impulsively to short-term fluctuations can lead to losses. Adopting a “HODL” mentality, derived from a typo of “hold,” encourages investors to weather market ups and downs and stick to their initial investment thesis. By doing so, you’re more likely to capture the long-term growth potential of your chosen crypto assets.
To learn more about Crypto, Web 3 and Blockchain, visit ZebPay blogs. Click on the banner below to join the millions taking part in the Navratri festive celebrations. Stay tuned for our next blog which will detail “Understanding Crypto Market Cycles” in this 9-part series.