Any financial investment has some degree of risk. Evaluating the risks and developing tactics of responding to them may mitigate the risks and help prevent losses. Managing risks is a vital component of successful crypto trading. Though you might have a great trade setup, nothing is warranted. Each business takes a hit from time to time, and developing an effective risk management plan can keep you in the business for a long time. This plan is especially critical for crypto trading, which comes with multiple risks. Stay tuned to discover the best methods of mitigating risks in crypto trading.
Examples of risks in crypto trading
Like any business, crypto trading has specific risks that you need to understand. The good news is that using trading platforms can help you minimize these risks. Here are examples of risks associated with crypto trading;
- Marketing Risks: These are risks associated with the rising or falling of prices in the crypto market. The prices are determined and affected by several factors that traders have no control over. On some occasions, the market may go against your position, so you have to prepare for such scenarios.
- Operational Risks: These risks can best be described as risks associated with difficulties in withdrawing crypto tokens from an exchange wallet. This usually happens when hacking has taken place or signed up in a not properly regulated company.
- Credit Risks: These risks are also associated with crypto companies failing to fulfill their obligations. Unregulated companies can decide to break down the system when they realize that they can get away with huge sums of money.
- Liquidity Risks: These are risks that occur when trading takes place in low-volume markets. In such a case, traders cannot convert their digitals assets to their preferred currencies due to low market cap and liquidity.
- Systematic Risks: The crypto market works in a given system that can break at any time. It involves the failure of the entire system in the industry or some part of the market because of several circumstances. Traders can also lose trust in a system and back off, something that may make it collapse.
How to Minimize the Trading Risks
Although the cryptocurrency market has the potential for handsome rewards, we must acknowledge that risks such as those mentioned above exist. Fortunately, you can avoid them by following a few tips that we have listed below. Here are the tips to help you have a safe and exciting trading experience in the crypto market;
Know When to Enter and Leave the Market
Profit is the main goal when venturing into any business, and you certainly need to buy low and sell high to make those profits. It sounds like an easy task that anybody can do. But have you asked yourself why people make losses with such an easy process? It all goes back to how low or high you establish when starting your business.
For effective trading, especially if you are in the crypto market, you need to understand when to enter for trading and when to leave. The slightest mistake you make by entering at the wrong time or leaving late can cost you a fortune.
Unfortunately, there is no specific time to enter and leave. You will rely on the analysis to determine the best time of action. For example, you will get to buy when the prices are relatively low and then return to sell when you think the prices are high.
Study buy and sell prices over a given period to help you in making the right predictions. You will also need to know other factors that affect the prices like partnerships, developments, market sentiments, politics, and other news. Other indicators like more buy orders in a given time signal you to purchase because chances are people are willing to hold onto their crypto, and the prices are relatively low.
It is at this time that you also need to be careful of price manipulations. Prices can be manipulated to the extent of making orders that are not supported by market sentiments.
Trade with Limited Amounts
The saying “don’t put all your eggs in one basket” applies in this case. You cannot trade with all your money because the deal looks lucrative. Ask yourself, what if the market goes against your strategies or predictions? Not all the time, your strategies or predictions can go like you wished, and always be prepared for that.
Allocate a given percentage of your money to crypto trading. From the amount you set aside for trading, diversify it and try trading in multiple cryptos and exchanges. This will prevent you from losing all your entire trading money if the market goes against you or in the event of a hack.
Embrace Good Security Measures
From the word go, you should understand that hacking can take place in the crypto market. This is mainly because this business is entirely online, and all transactions are made online. Hackers are working on new ways of getting into your wallet to access your money.
They are very innovative when it comes to keyloggers, malware, and other phishing strategies. Practicing good security measures ensures that your account and all that is there are safe.
One common way of getting into your wallet is through emails. Hackers understand that people trust emails and are likely to click on links or download material sent there. Avoid emails from unknown senders and report them spam without clicking any links associated with them.
Another way to deal with this is by ensuring your antivirus is up to date. Also, use secure and unique passwords for your accounts and don’t disclose them to anyone.
There are many exchange brokers these days. Before settling on a broker or company, make sure you thoroughly research its reputation. Check whether a legitimate financial authority regulates it. In case of a problem like hacking, companies that are properly regulated offer some compensation.
Once you are done trading, always move your coins to an external crypto wallet. Your coins are more secure here than leaving them in the exchange broker account. Then you will keep the private keys safely.
Apply Stop Loss and Take Profits Strategy
This is a common strategy that has proven beneficial, especially for those who don’t have much time online. Crypto business requires that you be online monitoring price fluctuations, but other things are to be done. So how do you go about it?
These are two tactics that can be used separately, all combined. Stop loss is described as an automatic process of closing trade once the prices go low up to a given point. On the other hand, taking profits involves automatic liquidation of the trade when the price of your asset rises to a specified mark.
Stopping losses helps you to avoid falling victim to the market. You can also make profits even when you are not as long as the prices hit the threshold. We also have to acknowledge that these strategies play a great role in taking emotional aspects out of the market.
Avoid Hype
Every trader fears losing, but that happens once in a while. On the other hand, become greedy, and you will lose everything that you possess. This is now about the emotional aspects and how to handle emotions when trading.
For instance, you may see an opportunity while trading but what matters is how you take the opportunity. How much do you invest when you see such opportunities? Whatever the deal, don’t be driven by your emotions or what we call hype to invest too much. Anything is possible in the crypto market, and the impossible can be possible.
Choose Quality over Quantity
Trading in the crypto market can be time-consuming, and in that case, you may waste much time. The effective way to overcome this is by choosing quality over quantity. When you are getting into any business, there is usually a plan that you will want to stick to.
As indicated above, there are occasions when the market trends go against your expectations. This is when you hear traders claiming that the market is not stable. Swing trading works best during strong trends, while automated scalping is more effective when the market is relatively calm.
To get the best out of the crypto market, first, understand the conditions affecting prices in particular and work smart towards achieving the best. By quality, we also mean coming up with a style that matches the company you choose. Or rather, choose a company that goes well with your style.
Conclusion
The crypto market is volatile and vulnerable to many risks. However, this should not hinder you from investing in such a lucrative business that is taking the world by storm. We have covered strategies that will help you have a safe trading experience. You are also allowed to make other decisions by yourself that you think can benefit the business.
Interesting Related Article: “The Beginner’s Guide to Forex Trading“
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