Risk Management Strategies in Crypto Trading

Risk management helps to prevent losses and is one of the most important aspects of trading, but yet traders are often uneducated about it. All too often traders can make huge gains but then go on to lose it all because they don’t have an adequate risk management strategy, or one at all.

In this article, we will discuss some risk management strategies in crypto trading that can be used to protect your trading profits.

Trading plans

Trading plans are a set of parameters that you can use to manage your risk. You can turn your capital into more capital, by using sound decision-making skills. Part of being successful at trading is being consistent.

This is especially true in the cryptocurrency field, as it is a highly volatile market. You really can’t succeed at cryptocurrency trading without a solid trading plan that works to your own personal advantage. You can try and identify what your personal advantages are, but most of the work will come from you and your own experiences.

Stop Loss and Take Profit

Stop Loss and Take Profit are two important methods traders can use when planning ahead for trading.  Successful traders know exactly what price they would pay and what price they would sell. Then they can measure the resulting returns against the main underlying asset, which in Bybit’s case, could be BTC, ETH, EOS, XRP and USDT. If the risk-adjusted return is deemed to be satisfactory, then the trade can be executed.

On the other hand, unsuccessful traders will often enter a trade ‘head first’ without any thoughts given to when and where to set Take Profit and Stop Loss. Emotions begin to take over and dictate their trades. A loss can cause people to try repeatedly to get their money back without any strategy in place, which more often than not will just end in tears.

On Bybit, you can set them up all in one click in the order confirmation window.

You can set the Take Profit/Stop Loss function in the ‘Order’ column or in the ‘Positions’ column.

How to effectively use set Stop Loss points

No-one, of course, wants to lose money when trading the market. That why it’s important to set a limit for yourself. This is where Stop Loss orders come into play. Traders often though struggle to decide where to set these levels. If you set them up too far away, this can end in big losses if there is an opposite movement in the market. Conversely, if you set them up too close, you can exit a position quicker than you would like.

Technical analysis can be used in the setting up process of Stop Loss and Take Profit, but fundamental analysis can also come into play. For example, if a trader holds assets ahead of earnings, and this asset gets market attention, they may decide to sell before the expectations in the market reaches too high of a level, irrespective of if the Take Profit price has been hit.

Stop Loss or Take Profit can also be set along support and resistance trend lines. They can be determined by looking at highs or lows that occurred previously on significant volume. Just as with moving averages, what is key is seeing which levels there is a reaction of the price to the trend lines and high volumes.

Diversification of assets

To fully realize your potential when trading, it’s important never to put all your eggs in one basket. Putting all your money into one trade may seem like a good idea, but it could just as easily result in a big loss as it does a big profit. That’s why diversification of assets is so important.

Diversification reduces risk by spreading out investments across several different financial instruments and industries. Its goal is to maximize returns by hedging investments in different areas.

Although it isn’t a guarantee that there won’t be losses, it is a very important long-term financial strategy when trading to minimize risk. Here, we look at why this is true and how to accomplish diversification in your portfolio.

Risk/reward ratio

Risk/reward ratio is often used by traders to compare an investment’s expected returns with the risk undertaken to earn them. This approach is often used by traders to plan out trades. It is calculated by dividing the risk (the amount potentially a trader could lose if an asset’s price moves unexpectedly) by the reward (the profit a trader expects/hopes to make when they close the position)

Risk/reward ratio explained

For example: A trader purchases $2000 contract of ETH at an average price of $200 and places a stop-loss order of $160 to ensure that losses will not exceed $400.

Also, assume that this trader believes that the price of ETH will reach $260 in the next few months. In this case, the trader is willing to risk $400 and have an expected return of $1200 in ETH after closing the position.

Since the trader stands to make double the amount that she has risked, he/she would be said to have a 1:2 risk/reward ratio on that particular trade.

Final thoughts

Ultimately, traders should decide how much they are prepared to lose when deciding on their Stop Loss placements, and stick to that. To get a picture of how frequent retracements may occur, specific securities and markets should be analyzed. If securities show retracements, they will necessitate more active strategies when it comes to Stop Loss and re-entry. Although Stop Losses can capture profit and be one of the most important risk management strategies in crypto trading, it goes without saying profitability is no guarantee.

* This content does not represent the views of Bybit. As such, it should be not be seen as trading and financial advice, it is merely an opinion. Trading is done at your own risk.