They say that your trading career is not over as long as you have capital. Some traders abuse this fact by forgetting about crypto risk management and bringing their massive portfolio down to a few hundred dollars. You can’t trade and hope for the best, it’s necessary to maintain discipline and minimize your risk.
Good risk management stems from staunch discipline and adherence to rules. But knowing how to manage risk is not all that obvious. You can only discover some good practices by trading and making mistakes yourself. But as someone who has already made those mistakes, I’m here to show you how to manage risk in practical terms.
What is Crypto Risk Management?
Risk management is the art of minimizing risk and following practices that prevent you from suffering unnecessary losses. Crypto risk management is important because digital assets are vastly more volatile compared to stocks and commodities. You can win thousands of dollars within the span of hours, but you can also lose everything in a single trade.
I had a lot of problems with risk management when I first started trading crypto. Losses didn’t matter to me because I saw how much money I could win in just a few trades. But such a mindset led to me losing cash, hoping that the next trade would offset my losses. When I had a streak of bad luck or when market dynamics changed, I’d lose on trades I shouldn’t have entered.
One day I stumbled upon a Twitter post from a famous TA trader. He shared a study which showed that placing tighter stop-loss orders – and perhaps suffering multiple small losses in a row – results in a higher win-ratio compared to placing fewer trades with wider stop-losses.
The study opened my eyes. I realized that losses aren’t inherently a bad thing. It’s worth suffering a few smaller ones for the sake of an entry with a higher success rate. Crypto risk management became a game changer at that point, and I soon discovered a lot of superior practices.
A Guide to Maintaining Discipline and Risk
Why do most traders lose money? Is it because they haven’t found the right trading strategy or because they haven’t traded long enough? The root of the problem is poor risk management.
Maintaining discipline and refraining from risky decisions maximizes a trader’s longevity. Refraining from excessive risk allows one to make mistakes and live another day. For a better part of the learning process, your journey will be executing and planning the wrong trades. Doing so helps you understand market dynamics and gain a feeling for how the market behaves.
But what is discipline anyways? Is discipline doing everything right or following rules too hard to follow? I tend to have a negative view regarding discipline – owed to a terrible sense of authority which I don’t want to fall under – but what if I tamed discipline and turned it into a friend?
Discipline is what helps us stay in shape, learn languages, build a career, and grow as a person. It nurtures consistency and the ability to stay true to ourselves. A vegetarian wouldn’t impulsively eat roast duck for dinner one day and neither should you fall victim to impulsivity after following a trading system for months.
A trading opportunity might look attractive momentarily, but it’s nothing more than a fleeting moment. Even if you somehow knew it was going to 100% pass you still shouldn’t go through with it, because remember, it’s all about staying consistent.
3 Good Tips
Treat trading as anything else in life and view it as a long-term journey. Many see it as an instant solution that grants wealth beyond all imagination. As a result, this type of person trades impulsively and does not see the forest for the trees. He’s in a constant state of tunnel vision – he’s trading as if he’s never going to trade again.
After losing a trade, your first thought shouldn’t be how to recoup your losses. Instead, think about what went wrong. Opening another trade position might look lucrative, but since you didn’t learn anything from your previous loss you’re bound to face another one.
Long-term thinking also involves compounding wins. Try to win as many trades as possible, no matter how small their profit. Constantly winning leads to compounding which means that you’re profiting more as you gain money over time. Additionally, your trading skills improve over time.
How can you know you’re disciplined without monitoring your market activities? Journaling trades is the easiest way to maintain discipline, view progress, and review mistakes. Holding yourself accountable brings you closer to a mature perspective on your place in the market. It makes you understand that trading is a day-to-day struggle and that you have hundreds of pages to fill before calling yourself a real trader.
Journaling also introduces objectivity and data to the game. After a week’s worth of trading you can take a good look at yourself and see what you’re doing wrong. Who knows, maybe the issue is that you trade big sizes or don’t use wide enough stop losses. Such a realization can drastically improve your crypto risk management skills.
Respect Trade Invalidation
The market has invalidated your trade. Close your position and walk away. Because if you can’t respect your original trading plan, what are you even doing? A plan is a plan and a trading system is a trading system – you shouldn’t rely on divine intervention, take the L.
Whether you trade chart patterns or narratives following a plan is a must. The moment things go bad you should take a second look at the market and figure why your trading thesis is wrong. You’ll either learn something new or find an even better trade.
3 Behaviors to avoid
Forget About Fear
Why let the market control you? Whenever you experience fear, there’s a slight chance you’re succumbing to needless emotions and impulsive behavior. Fear leads to trading hesitancy, not risking at all, and selling or buying out of sheer panic.
Stay calm and level-headed. The worst thing that can happen is that you had a terrible plan all along. Trading when you’re afraid is a sin in the market, and you should always avoid it.
Fear is followed by greed. If you practice panic selling you probably also FOMO into every trade you see. FOMO might be profitable in rare situations, but you’ll mostly destroy weeks worth of paychecks for momentary delusions.
FOMO is worse for traders than investors because the volatility is higher. An investor gets stuck with a position and leaves with a 2% to 5% loss. A trader loses up to ten times more in the same situation due to leverage. Refrain from panic buying and your wallet will become thicker than ever.
Trading Out of Boredom
We have all done it at one point. It’s a slow Wednesday night and you’ve got nothing better to do than watch crypto go up and down. You open a trade to make the day more exciting, but oh wait, you’re now stuck with a trade you realistically can’t afford to lose. Another hundred dollars go down the drain, like the prospects of a trading career.
There’s hundreds of things to do when you’re bored and trading isn’t one of them. You’re more likely to make a mistake than to score money if you open a position without thinking it through. The same applies to trading out of boredom, but with a plan. You might close or open the trade sooner than you have planned.
Is Crypto Risk Management Difficult?
Crypto risk management is about thinking long-term and not succumbing to terrible trading practices. Create a plan when you feel you are in your top form and then execute the trade. There’s nothing to modify once your strategy is ready – especially if you’re having second thoughts after the market printed one too many red candles.
Risk management isn’t difficult because it boils down to controlling your emotions. You’re going to minimize your risk as long as you refuse to trade impulsively. It’s like trying to maintain a healthy diet. All you need to do is cut out sugar and minimize carbs.
However, knowing what’s right and what’s wrong as a beginning trader is not that easy. You have no experience, so you’re bound to make mistakes until you learn from them. I recently put together an ebook that helps new traders understand how to trade cryptocurrencies and go from zero to crypto hero. In only 90-pages, you’ll learn everything you need to know about crypto markets.
Download a free copy of my Crypto Trading eBook