No one can claim to always be in a superior position in the financial market. A successful trader is not one who never fails; On the contrary, they are good managers of investment risk. If you want to be among the winners, you need to learn how to manage risk in the crypto market. On the one hand, you must know that the biggest risk for a trader is not to take risks, and on the other hand, you must try to protect yourself from the terrible risks of the market. In this article, we will introduce a proper risk management strategy in the cryptocurrency market. You will also learn how to save capital in the market and grow it at the same time.
What is risk management?
Risk management or risk management is the systematic application of management policies, procedures, and processes relating to risk analysis, assessment, and control activities. Risk management is the process of documenting the final decisions made and identifying and implementing criteria to reduce risk to an acceptable level. Risk management is very useful and effective in the long term in all financial environments, including the cryptocurrency market. In the following, we examine the 5 most important ways to manage risk in the financial and crypto markets.
1. Avoiding risky activities
Avoiding or not participating in risky activities is a good way to reduce risk; For example, people who smoke and participate in these dangerous activities are at risk of various diseases. Avoiding risky behaviors in the digital currency market is also one of the ways to reduce risk in this market. Traders in the cryptocurrency market can reduce their trading risk by avoiding risky practices like trading on submarket exchanges with unknown developers.
2. Acceptance of risk
Accepting risk is a significant activity and usually involves additional costs. Returning to the same health example, a person who pays additional insurance and anticipates future possibilities manages the risk more easily when faced with it. This is also true in the crypto space, and merchants can better manage their risk in all aspects such as theft by paying for the security of their digital assets by purchasing wallets and security tools.
3. Risk distribution
Another important step to consider is risk sharing. In the digital currency market, you can reduce the possibility of potential risks by choosing a diversified portfolio of digital currencies.
4. risk transfer
Using health insurance is an example of risk transfer. In this case, the person leaves almost all the risk to the insurer, and the insurer accepts this responsibility in return for receiving the money. The insurer and the insured sign documents thereby forming a contract between them. The insurer measures the strategies needed to cope with the risk and, accordingly, determines the amount to be received. Such strategies are very useful in the trading and investment environment and will contribute to risk management.
5. Loss prevention and reduction
This method does not eliminate the risk; In fact, it reduces it. This method focuses on controlling damage and preventing it from spreading further. Taking preventive measures in the field of health can be seen as an example of this approach. Health insurers pay close attention to doing such things and provide additional services to the insured. Such services may include assistance with paying club dues or conducting annual general reviews. Actions like these help the insurance company pay less in the long run. This method is also very useful in the field of investing in the crypto space, and taking preventive measures, such as not holding funds on exchanges, can significantly reduce the risks.
Why is it important to manage risk in the crypto market?
Financial markets are inherently risk-averse. There is almost no safe and risk-free investment to be found, But all the efforts of investors are to reduce the potential risks that threaten their capital. Choosing safe investment options is one of the capital management solutions in the cryptocurrency market. This choice requires proper knowledge and understanding of cryptocurrency market opportunities. People don’t invest to lose money. So they should know well how to protect their capital. Therefore, learning the principles of risk management is very important when investing.
Risk Management Strategy in the Cryptocurrency Industry
As mentioned above, risk management in digital currencies refers to a series of actions that must be taken to maintain the value of capital while increasing it. A general method of risk management cannot be introduced; Because risk management solutions are closely related to the investor’s personality, age, capital value, risk tolerance, and investment goals. Here are the best risk management strategies in cryptocurrency:
1. Use the one percent rule
The first important strategy for entering the crypto world is the one percent rule. We have to set this rule for ourselves, how much profit can be lost if the market moves in the opposite direction of our expectations? Some traders use one percent for their trades. This means that they consider their loss limit equal to one percent of the total capital of each trade.
2. Using multiple timeframes
Using multiple timeframes helps investors identify key market trends and gain a more complete picture. Professional traders focus on the larger time frames first and then find the final market signal by taking a closer look at the shorter time frames.
3. Using passive income methods
There are various ways to earn passive income in the crypto market, in this case, instead of transferring the asset to the wallet, we can stream it and make passive income. One way to earn passive income is yield farming, using this method we can recover a part of our losses when the property price falls.
4. Compliance with profit and loss limits
Before starting a trade, it is better to carefully determine the limit of profit and loss. This demonstrates the professionalism of investor behavior and risk management in the trading market. Greed is also the biggest obstacle that prevents people from sticking to profit and loss limits. And investors should be able to deal with this behavior.
5. Buying and selling cash step by step
Sometimes there are situations in the market where the market is rising enough but the trader is still on the verge of saving the profit and exiting the market or staying in the trade and missing out on future profits. In this situation, it is better to use the buy-and-sell strategy. In other words, instead of removing all our assets from the transaction, we remove some and continue the transaction with the rest of the capital.
6. Avoid emotions and impulsive behavior
Traders’ moods are highly influential in their failures and successes. Investing has a very sensitive point and people must be able to control their emotions. Some people make quick decisions with little changes in the market and definitely don’t have a successful investment experience. Investors must be very patient. In general, the implementation of all risk management methods in digital currency depends on avoiding emotional behavior.