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Risk Management Methods in Cryptocurrency Trading – 2021 Guide

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Written by Quentin Hack

Since the skyrocketing growth BTC experienced in 2021, it can be said that the majority of people have started thinking about investing in this crypto. Not only that but also Ethereum has managed to establish itself as reputable crypto that has enormous growth potential. Without a doubt, it will achieve new heights pretty soon.

Anyway, we can see that the whole concept of cryptocurrencies has managed to attract attention not just from people, but from many governments as well. We can see that more and more of them decide to impose numerous taxes on traders and their income. Even though there’s no personal data involved in transactions, they still can be traced through the address sent from the e-wallet.

So, we can see that all the traders are slowly preparing for the situation that will follow after these taxes are imposed. However, the majority of things will remain pretty much the same. For example, every trader will need an e-wallet and a tool that will make participation in the market much easier. In case you want to take a look at one of these, check here, and see a high-detailed review.

At the same time, every trader will need to have to think about having a proper risk management strategy. We are sure that a vast majority of them don’t even know what it means. So, we’ve decided to provide you with all the relevant information about it. Without further ado, let’s get started.

The Most Important Risk Management Strategies

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A rule that can be used to describe the whole concept of crypto trading does not risk by investing more than you can spare. Surely, you know that this market can be pretty risky sometimes due to all the fluctuations of the price. That’s the reason we don’t advise traders to spend more than 10% of their budget. That way, they will be able to save some of it for the days to come. We can say that there are three main risk management strategies. Now, we will present them to you.

  • Position Sizing

The first risk management strategy we would like to discuss is called position sizing. Basically, this strategy dictates how many tokens and coins a trader would like to purchase. Of course, the potential profit teases traders to invest more than the 10% we recommend. In these situations, they are eager to invest 20%, 60%, or even 100% of the capital they use for trading.

But it needs to be said that investing these amounts can put traders at a pretty dangerous financial risk. In fact, losing this amount can be fatal in some cases, since they will not be able to get back into the market before they raise enough funds. There are three main ways you can achieve this risk management method.

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Enter/Risk Amount

We are talking about the approach that considers two different amounts of coins. The first one being the one that you are willing to invest, and the other one being the amount that you actually can spare to invest. The best thing for a trader would be to take a look at the amount he or she is willing to invest in it. That way, the trader will have the best possible insight into these figures and will be able to have precise knowledge about how much of them should be used.

Kelly Criterion

Now, we would like to discuss an approach that’s referred to as the Kelly criterion. It was created by John Larry Kelly back in the mid-fifties, way before the concept of cryptos was invented. Basically, it is a position sizing that defines the percent of the capital to bet. It is best for those people who are interested in long-term trading. Without any doubt, it can be highly effective.

Piranhas and Sharks

The third and final approach we would like to talk about is invented by Dr. Elder. The name of the concept is sharks and piranhas. According to this expert, every position should be limited to 2%. The good doctor compares it to the shark bite. The higher the bite, the chances of the result being disastrous are higher. The other one consists of limiting yourself to 6%. That approach is referred to as piranha since these fishes take small bites until they devour the target completely.

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  • Stop Loss + Take Profit

When discussing “Stop Loss”, it needs to be said that this is the executable order. It means that it decides to put a stop and not act on the position when the price gets too low. Of course, this limit needs to be set for it to work. At the same time, “Take Profit” is an order that demands action when there’s an opportunity to do so. Without any doubt, both of these two can provide you with many benefits down the road. Plus, the order will be executed even when you are not in front of your desktop PC or mobile device. Of course, based on your orders.

  • Risk/Reward Ratio

Last but not least, we would like to talk about a risk management strategy called risk/reward ratio. By using this one, the trader compares the level of risk with the potential returns. As you know, the risker your position is, the more profit you can expect in the end. By using this approach, the trader will have a much better insight into the whole process and will be able to calculate the potential and the losses caused by the investment. Therefore, it needs to be said that this is certainly one of the best ones. Be sure to use it and reap all of its benefits.

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In Conclusion

Since the cryptocurrency market can be pretty complex sometimes, it is important for traders to understand what they can do to have the best possible risk management strategy. Here, we’ve presented you, our reader, with the best possible approach. Surely, you will see that all of these can provide you with many good things. You just need to make sure that you have done it properly.

About the author

Quentin Hack