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What is Risk Management?

Risk Management is about identifying risk and putting the necessary steps in place to reduce it. In this article we’ll take a look at at the various key elements to efficient risk management that every trader should have in their arsenal.

Risk management is the identification, evaluation, and prioritization of risk followed by coordination of resources to minimize, monitor, and control the probability or impact.

Portfolio Management

Portfolio Management ensures you have a well balanced array of investments to suits your profit goals. Below I will show you my preferred portfolio setup that allows for effective risk management.

7.5% BTC (Not Selling) It’s good to keep a portion of Bitcoin that you don’t sell just in case Bitcoins growth exceeds all of your alt-coins growth. The main reason people invest into alt-coins is because they believe their alt-coin growth will exceed that of bitcoins growth, however.. as we’ve seen before there’s only a select few coins that achieves this.

7.5% USD (This can be used to buy new BTC blood or /USD pairs in a bear market) One of the most profitable yet simple trading strategies is waiting for blood to make your move! often traders will buy coins as they appear to show an increase in volume or breakout which is great but many people don’t recognise the power of buying the blood.

20% BTC (to buy blood)

< 3% Margin Trading (If you’re comfortable with the extremely high risk that margin trading presents then you should definitely consider adding a percentage of your portfolio to a trusted margin trading website)

25% Low — Medium market cap alt coins ($10m — $250m)

37% Medium — Large market cap alt coins ($250m — 50b +)

You can also swap some of your BTC holdings for strong coins (changes all the time)

Anyone who’s familiar with the basic principles of investing knows the golden rule for making any investment portfolio work over the long term: diversification. When you invest in multiple types of digital assets, with multiple levels of associated risk, you spread your risk out. You should practice diversification regardless of your portfolio size. You should diversify based around a variety of fundamental differences; market cap, use cases, technological sector, exposure, upcoming fundamental catalysts, partners & teams.

As Warren Buffet said: ““Diversification is a protection against ignorance. It makes very little sense to those who know what they are doing.”

Risk Management Plan

It’s crucial you go into each trade or investment with a trading plan and a good portion of that plan should cover risk management. If you don’t execute your trading with at-least some form of structure the market will quickly tear you apart.

Entry Plan

Position Sizing and Timing

It’s crucial that you have an understanding of sensible position sizing and timing, otherwise you won’t last very long in such a volatile and unpredictable market. A general rule of thumb is that you should never have anymore than 30% of your portfolio in any one coin, in-fact, traditionally stock traders would risk no more than 3% of their capital per trade. Diversification is a key element to risk management.

Scaling Entries

Scaling is a method of trade management that allows you to reduce potential losses and maximise potential profits, by buying in increments over a period of time to average in the most risk effective entry. There are two types of scaling: scaling in and scaling out. Scaling into a trade means that when you enter the market, you initially enter with just a fraction of the total intended position size, and then observe how this initial market entry develops. If the trade works out as intended, then you can proceed to increase your position in the market and take advantage of the price moving in your favour.

Pre-defined Targets

There are multiple ways profits targets can be established, all of which come down to identifying the risk:reward ratio.Having pre-defined profit taking targets is perhaps the most technically and emotionally difficult aspect of trading. The trick is to exit a trade when you’re up a satisfactory amount, rather than waiting for the market to come crashing back against you and exiting out of fear. Traders will use a a plethora of trading indicators and general market understanding to gauge their pre-defined targets. The difficulty of pre-defined targets is that it’s human nature to not want to exit a trade when it’s up a nice profit and moving in your favour, because it ‘feels’ like the trade will continue on in your favour.

Exit Plan

Having an exit plan is a crucial part of risk management. The most common technique to manage risk upon exiting your position is implementing a stop loss. Stop losses help to mitigate emotional decision making as you assess the market before your entry and gauge a sensible exit point usually based around support / resistance / fib levels. Typically you will see stop losses of around 5–15%.

Trailing Stop Losses are used to secure profits or to break even and are implemented when a coin has risen a certain percentage above your entry point. For example, your coins runs up 20% from your entry, you then have the option to implement a trailing stop loss typically around your buy in price or slightly above to significantly reduce risk. This method works well with the famous quote ‘’cut your losses quickly, and let your winners run’’.

are used to secure profits or to break even and are implemented when a coin has risen a certain percentage above your entry point. For example, your coins runs up 20% from your entry, you then have the option to implement a trailing stop loss typically around your buy in price or slightly above to significantly reduce risk. This method works well with the famous quote ‘’cut your losses quickly, and let your winners run’’. Market orders attempt to buy/sell at the current market price, buying up available sell limit orders sitting in the order-books. The main issue with a market order is that slippage may occur (where you get a slightly higher price with a buy market order or slightly lower price with a sell market order). In very volatile times, slippage can be substantial.

attempt to buy/sell at the current market price, buying up available sell limit orders sitting in the order-books. The main issue with a market order is that slippage may occur (where you get a slightly higher price with a buy market order or slightly lower price with a sell market order). In very volatile times, slippage can be substantial. Limit orders place your order in hopes that it’ll be filled by someone else’s market order. When the market price reaches that price, it’ll buy or sell given there is a buyer or seller. Limit orders aren’t subject to slippage and sometimes have lower fees than market orders.

place your order in hopes that it’ll be filled by someone else’s market order. When the market price reaches that price, it’ll buy or sell given there is a buyer or seller. Limit orders aren’t subject to slippage and sometimes have lower fees than market orders. Stop orders place a market order when a certain price condition is met. So it works like a limit order, in that it goes on the books, but it sells like a market order. Stop orders are therefore subject to the same fees as market orders and are subject to slippage.

place a market order when a certain price condition is met. So it works like a limit order, in that it goes on the books, but it sells like a market order. Stop orders are therefore subject to the same fees as market orders and are subject to slippage. Committing to your Stop Loss is very important. You should have confidence in your pre-defined exit plan otherwise you shouldn’t be taking the trade opportunity. Sometimes not having a position is a position, especially if you intuition is telling you no. Committing to your pre-defined stop loss is important as sometimes your emotions can impact your decision making and ultimately leading to you exiting at the wrong time. The chart below shows the required percentage gain to break-even from a loss. This should help you to understand that cutting your losses is important and you shouldn’t always adopt the HODL (hold on for dear life) approach. Whilst HODLing you not only allow for your loss to increase thus making it harder to break even, but you’re also losing out on the ability to take other trades and further your trading knowledge.

Splitting Positions

Splitting Positions refers to the method of selling in increments at either a profit in as bull trend or at a loss in a bear trend to ultimately find the most risk effective point in which to take profits. Splitting your position is essentially averaging out of your market position in increments over a period of time, an example of when this could be beneficial is for coins that have over 1000% + gain. Traders will often profit take when they’re 50%, 100%, 200% up on a coin whether that be taking out their original position so there’s no risk involved or exiting with profits. If you managed to split your position effectively you would still leave a small percentage in, in-case your coin rises exponentially which we have all seen happen to the most unexpected coins. This is very similar to scaling positions.

Paper Trading

Paper trading allows you to practice your entry and exit plans without losing real money. A paper trade refers to using simulated trading to practice buying and selling without actual money being involved. I think this is a very useful tool that many traders turn their nose up at. I paper traded every day for months before entering the markets with real money. You can simply grab a notepad and pen and log entries/exits, and profits/losses and then try to justify said coins actions, ultimately developing your understanding of market psychology and how to execute trades. Paper trading is a great way to practice risk management and to develop your individual trading plan. Typically paper trades will include the following information; Starting Capital, Date, Fee’s, Gross Profit, Net Profit. Make sure you don’t over complicate things.

Psychology

Letting the market come to you. Sometimes not having a position is a position, especially if you intuition is telling you no. Identify the overall market trend and act accordingly. If it’s a very clear bull season you can be more relaxed with your risk management and position sizes, and if you’re confident you can adopt a somewhat aggressive trading style. If the overall trend is clearly bearish then you shouldn’t be hunting for trading opportunities, you should let them present themselves. Capital preservation is key.

Sometimes not having a position is a position, especially if you intuition is telling you no. Identify the overall market trend and act accordingly. If it’s a very clear bull season you can be more relaxed with your risk management and position sizes, and if you’re confident you can adopt a somewhat aggressive trading style. If the overall trend is clearly bearish then you shouldn’t be hunting for trading opportunities, you should let them present themselves. Capital preservation is key. Controlling Emotions is all about identifying whether the principals in your pre-defined plan practice good risk management or is borderline gambling. If you follow each of the steps I have included in this article thoroughly for every trade you will feel more confident as you’re executing a pre-defined plan that has no consideration for the emotion you could be feeling during real market time. Poor emotional control will often lead to FOMO (fear of missing out), chasing losses, buying without building a core understanding of the coins fundamentals, stupid position sizes (all in).

Trading Type: The Accumulator. Accumulators are risk-takers and have a strong conviction in their ability to be successful investors. They often exhibit overconfidence and have a false sense of control. This increases the chance for excessive and unnecessary risks. Accumulators often struggle to adhere to a consistent strategy over the long-term, and may make dramatic short-term decisions based on their own beliefs in market direction. Accumulators can overestimate their own skills and abilities, as a result, they may believe they can effectively time the market even in spite of an overwhelming body of evidence that proves this is not possible. Accumulators should seek out data that may be contrary to their preconceived beliefs in order to ensure they achieve a balanced analysis before making important investment decisions.

The reason I am sharing The Accumulator with you guys is because it’s crucial that traders understand no matter how confident you may feel there’s always a good possibility you’re overestimating your abilities. You should have enough control over your emotions to allow yourself to openly criticise your own trading style and investments otherwise your investments and trading will be in control of you. I always tell myself the market is against me and wants to get rid of me at any opportunity it gets; this makes me look at everything in a different light. Many Crypto traders, especially traders who are new to the game believe the market is going to work in their favour due to the success stories they’ve previously heard of, and this is far from the case.

Cut your losses quickly and let your winners run. Make peace with your losses, don’t ignore them and especially don’t let them impact your emotional composure / decision making as a trader. Sometimes not having a position, is a position. You can always exit and re-take positions to perform risk management, even if that means you buy back in slightly higher than your original entry. Capital preservation is more important than capital growth.

Disclaimer: I am an analyst, not a financial advisor and this is not investment advice. What you do with this information is up to you.

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