Trading cryptocurrency is a hugely popular activity in the crypto space. This is primarily due to the sizeable amount of returns that can be made in the market. The volatility of the market generates numerous trading opportunities that can be capitalised on. One large part about being a successful crypto trader is being able to mitigate risk whilst trading. Here are a few techniques that traders typically use to mitigate risk whilst trading in the crypto market.
Stop Losses and Take Profit Targets
Stop losses and take profit targets are basic but important ways that traders mitigate risk in the market. Stop losses prevent traders from being subject to emotional trading by preventing traders from experiencing worse losses when a trade does not go in their favour. Take profit targets are also great because it forces traders to think about the price at which they are willing to sell their position to take profits. In addition, crypto signals and crypto bots are also good tools to eliminate emotional trading.
Position Sizing
Another great risk management technique is position sizing. With this strategy, traders will not use more than 1% of their trading capital. For example, if a trader goes on a 5-trade losing streak they would still have 95% of their trading capital. Furthermore, with position sizing, going on a losing streak would mean that the trader would progressively use a lower proportion of their trading capital, which further mitigates risk for the trader. Alternatively, going on a winning streak would also mean that the trader would use an increasingly higher proportion of their trading capital.
Risk/Reward Ratio
This is probably one of the more important risk management strategies on this list. The most successful traders are able to weigh up the risk to reward ratio of placing a trade. This is important in avoiding bad trades that will lose you money. The risk to reward ratio formula is the following:
(Target – entry)/(entry – stop loss)
As a general rule, the following guidelines should be followed with the formula:
- If it’s lower than 1:1 never place a trade
- 1:1 is breakeven
- 1:2 is great to trade
- 1:3 is even better and is an ideal ratio
Conclusion
Being a successful trader has a lot to do with effective risk management due to the severe losses that can be caused as a result of the crypto market volatility. That’s why it is extremely important for traders to be aware of techniques that will prevent such losses from happening. We have only touched on a few risk management techniques and there are much more out there for you to use.
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