A guide on risk management in crypto trading

March 21, 2024
Last Update March 21, 2024

Crypto trading is a risky endeavor. It may bring you a fortune but also can be a cause of huge losses. It all depends on how you manage risks while creating your trading portfolio and how you approach the risk management matters in crypto trading.

Create a solid trading plan

Most beginners start trading without any plan. They make trades based on their mood, instinct, etc. That’s why the majority of traders end up losing their money.

Creating a solid trading plan is the first step you shall take. This plan determines your approach to trading. It is a system that you have created based on your theoretical knowledge and experience in the market.

In your trading plan, you include:

  • The time when you open trades
  • The time when you close trades
  • The risk level you take for each trade
  • Risk-to-reward ratio.

Once you have all this planned, you will manage your funds very properly.

Trade with what you can afford to lose

Beginners mostly believe that nothing can happen with their funds, and they keep the situation under control. But you shall always remember that losing all your capital invested in trading is always possible. That’s why if you trade with funds you cannot afford to lose, you will feel constant pressure. It can compromise your decision and lead to more losses.

The crypto market is extremely volatile. That’s why it is important to trade a small percentage of your income.

Size your positions

Before placing any trade, determine how much risk you are going to take. Never put all your available funds on a single trade. Normally, professionals choose to allocate a specific percentage of their available resources. For beginners, it is recommended not to use more than 1% of their available resources for one trade. Some traders allocate more funds but the amounts are still fixed.

Avoid leverage if you don’t have enough experience

Leverage lets you use borrowed funds for trading. If you are lucky, leverage trading can magnify your profit. But if your trade ends in a loss, your losses will be magnified, too.

Leverage trading requires some skills and knowledge. That’s why if you are just starting your trading way, avoid it, and when you start with leverage trading, use smaller sums first, and increase them when your experience and knowledge allow it.

Calculate your risk-to-reward ratio

The risk-reward ratio refers to the risk versus potential reward that you expect from your trade. This ratio shall be measured before you execute a trade. If you cannot determine it, we recommend not placing the trade.

Normally, the ratio value that traders use is from 1:1.5 to 1:3. 1:1.5 means that the possibility of getting a profit is 1:1.5 times higher than the risk. If the ratio is 1:1, it is called that the trade ends break even (no profit, no loss). If you see that the ratio is lower than 1:1, do not execute the trade.

Use stop-loss orders

With a stop-loss order, you specify the exit point in the market. If a trade goes not as you expected, a stop-loss order limits your losses. 

A stop-loss order doesn’t eliminate losses completely, at some point, you will lose some of your funds. But it limits the loss to a specified degree. 

They also prevent you from exiting a trade too early and missing out on the profit you could have made otherwise.

Use take-profit orders

These orders work similarly to stop-loss orders, but instead of limiting losses, they ensure you get your profit. With a take-profit order, you collect your profit when a price reaches a level determined by you.

Consider all of them

Considering all these ways to manage risks is crucial to become a successful trader. They make a difference between those who lose more than they invest and those who make money on trading.