Smartvestments 31: The Importance of Risk Management in Trading

When you're trading, it's important to remember that there is always risk involved. By taking a smart approach to risk management, you can reduce your chances of experiencing large losses.
Risk Management

Investments have become a popular subject for teenagers, and more & more people have chosen to educate themselves financially since the Covid-19 Pandemic. However, this episode forced us to stay home and think about the possibility of an economic crisis. Almost every financial market has seen a sudden growth of users and accounts that started trading and investing. 

In cryptocurrency, digital assets enjoyed price growth because of the inflation that has dramatically risen in the last couple of years, especially in developing countries. Even with this, most investors lose money on cryptocurrency and the stock market. We can protect our portfolio by doing proper risk management and knowing the market well enough to synchronize ourselves with it.

What is risk management?

As the name suggests, it’s a process that carefully evaluates our portfolio to identify the risk factors and control & limit financial losses. This approach is taken on a larger scale in institutions, banks, companies, and almost everywhere-and the beautiful part is that we can apply it when trading. 

The process is meant to help traders identify the chances of losing money – where and why – so they can make the necessary changes. But unfortunately, the risk of losing money or failing often comes with other problems: an incorrect strategy, our weakness in listening to emotional investors in the market, being led by feelings, and so on. We can become more balanced when we analyze and understand the risks we take.

How does risk management work?

We have a few steps to follow to determine our portfolio’s risks and implement general solutions to monitor it better.

Risk identification: When we think we know them all, we have the impression that we are making the best choices. However, opening up to a financial market often means exposing yourself to various risks – the possibility of a project losing a legal process, the risk of a hack due to lousy Blockchain protocols, and so on. So the most important thing is to identify the risks, no matter how small, to know exactly where to start.

Once we find a risk in our portfolio, we need to analyze it and see how it would impact us. Some cryptocurrencies are more secure than others. While the risk of one can mean a temporary drop of 50%, others can be delisted from significant exchange platforms. We then assess these risks because they must be classified and prioritized according to their importance and impact. For example, a 25% decrease can be considered medium risk, while a margin call would be a complete loss of assets. Some margin transactions may affect more money than we initially traded with. Depending on these considerations, we will know how to move on to the next step:

Risk management: The risk must be minimized or even eliminated if it is too dangerous and would lead to losses we could not bear. If we only reduce it, it is essential to keep an eye on it and actively use alerts, stop losses, or other aids offered by trading applications.

What strategies can we use for cryptocurrencies?

Crypto is not an area where we can eliminate risks, but it is essential to identify them and know exactly what we are doing. People come here attracted by the technology behind it and the much higher gains than in many other financial markets. But these benefits come with very high risks, and one of the most critical risk management strategies for crypto is the risk-reward ratio. When the risks are high, traders will only be interested in high-profit opportunities, with a ratio of at least 1:3, where the gain is at least three times the risk of the transaction.

After establishing a suitable trading strategy, it is essential to use stop loss and take profit orders constantly. If something happens in the market and we are not careful precisely at that moment, the risk is higher – so the best thing would be to set these points directly for more security when we calculate everything. 

Lastly, the most increased diversification is recommended for the lowest possible risk. If we also prefer Altcoins, choosing the best projects from the best segments is vital. For example, the gaming sector always has much higher losses than the technical ones due to higher volatility. At the same time, we will keep the most money in the safest cryptocurrencies.

For a better trading experience, register on Your Friendly Crypto Exchange. You can find over 400 cryptocurrencies and 1000 pairs on IXFI. Discover the endless possibilities.

Disclaimer: The content of this article is not investment advice and does not constitute an offer or solicitation to offer or recommendation of any investment product. It is for general purposes only and does not take into account your individual needs, investment objectives and specific financial and fiscal circumstances.

Although the material contained in this article was prepared based on information from public and private sources that IXFI believes to be reliable, no representation, warranty or undertaking, stated or implied, is given as to the accuracy of the information contained herein, and IXFI expressly disclaims any liability for the accuracy and completeness of the information contained in this article.

Investment involves risk; any ideas or strategies discussed herein should therefore not be undertaken by any individual without prior consultation with a financial professional for the purpose of assessing whether the ideas or strategies that are discussed are suitable to you based on your own personal financial and fiscal objectives, needs and risk tolerance. IXFI expressly disclaims any liability or loss incurred by any person who acts on the information, ideas or strategies discussed herein.


Related Posts

About IXFI

We’re building the future of finance by helping millions across the globe have an easy and safe way to access cryptocurrency. Our goal is to deliver a new age, revolutionary, yet friendly product, that meets our users’ needs.

Follow Us

Stay up to date