Risk management is something that’s crucial if you want to make it in crypto. There’s so much happening in crypto which results in severe losses if you don’t have a proper risk management strategy.
Hence, here’s a guide on this.
We are constantly managing risks throughout our lives – either during simple tasks (such as driving a car) or when making new insurance or medical plans. In essence, risk management is all about assessing and reacting to risks.
When it comes to financial markets and business administration, assessing risks is a crucial and very conscious practice.
In economics, we may describe risk management as the framework that defines how a company or investor handles financial risks, which are inherent to all kinds of businesses.
For traders and investors, the framework may include the management of multiple asset classes, such as cryptocurrencies, forex, commodities, shares, indices, and real estate.
There are many steps to risk management, which I’ll be showing below together with an explanation. Following these steps helps you mitigate financial risks you didn’t want to take.
Typically, risk management involves 5 steps, which I’ll be describing below.
1). Setting objectives
2). Identifying risks
3). Risk assessment
4). Defining responses
5). Monitoring
Your first steps would be; what are your main goals? In other words, how much are you willing to risk to take a move towards your next goal?
For example, if you want to make $1000, how much are you willing to risk to achieve this? Do you risk $100 per trade, or $500?
The second step is about defining the potential risks with your investment. The aim is to reveal all sort of events that can happen that may cause negative effects.
Basically; what FUD can happen with your investment?
After you’ve identified the risks, the next step is to evaluate the frequency and severity.
Basically; when the FUD happens, how often/big will this be, and how severe will the FUD be? (For example, $LUNA FUD absolutely KILLED it).
The 4th and one of the most important steps is defining a response. If such an event happens that FUD will arise, what do you do? For example, if you see negative news about your investment, when do you sell?
Set points when to sell, for example, at -20%? Or -50%?
The final step would be monitoring. What this means, you have to pay attention to the FUD and risks. If you’re not watching your investment or news about your investment, you’re not going to see the risks that are popping up.
There are still a few examples why a strategy or trade setup might be unsuccessful. For example, you get emotional and end up selling out of panic.
Usually, emotional reactions cause traders to ignore or give up their initial strategy. This mostly happens during bear markets, hah.
It’s absolutely CRUCIAL you do not get emotional when trading, but stick to your strategy.
Below are a few examples of financial risks, along with a short description of how people can mitigate them.
1). Market risk – Can be minimized by setting stop-loss on each trade, so that positions are automatically closed when you want, instead of causing bigger losses.
2). Liquidity risk – Can be mitigated by trading on high-volume markets. Usually, when you trade a high market cap coin this doesn’t happen as it’s more liquid.
3). Operational risk – Can be mitigated by diversifying your portfolio, preventing exposure to just one project. Something that might help you is doing research into different projects, to make sure you’re not putting all your eggs in just one basket.
It’s CRUCIAL to consider creating a risk management, before opening a trade or allocation a certain part of your portfolio. However, it’s important to know, RISKS will always bet here and can’t be 100% avoided.
Overall, risk management is about handling risks, but not about completely getting rid of risks. Never ever invest more than 15% into one project, as that’s proper portfolio management. Never marry your bags, either. Sometimes you have to sell at a big loss.
That’s it for now. Thanks for reading!
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