Risk management is a critical element to the success of any trader in any market. Regardless of the size of the capital you trade or invest in, losses are inevitable, especially in very volatile markets like cryptocurrency. It is important to learn how to handle risk in order to minimize losses. However, it is also necessary to master risk management to get maximum profits. Because the more you are willing to risk, the greater the potential reward.
Risk management to avoid losses
Even seasoned traders with impressive track records of reading the market can lose everything on a bad trade or two if they fail to properly manage risk or let their emotions get in the way. The lure to hit the jackpot or chase market sentiment can be too strong and allow traders to tarnish or become too confident.
In order to avoid widespread losses and allow traders to trade with a cool head, at least basic trading tools and forms of risk management must be used. This includes setting trading rules such as market orders, limit orders and stop-loss orders that allow traders to limit their losses by triggering an action when certain conditions are met.
These mechanisms allow traders to take a break from the screen and trade with confidence knowing that they can limit their losses or take profits at an acceptable level. The limit at which this is set depends on the risk tolerance of the investor and the amount of capital that he is willing to lose on a particular trade.
Another type of risk management is of course the golden rule of always keeping a diversified portfolio spread over several assets. That way you can get exposure to more assets while hedging losses and making sure that one bad investment doesn’t wipe out all of your capital.
Risk management to maximize your profits
Last year we saw astronomical growth in the cryptocurrency space, with amazing gains on most of the major coins. Decentralized finance sparked a passion for income farming and generating attractive passive income on crypto assets, as well as enabling an entire ecosystem of borrowing and lending outside of traditional financing. Against the backdrop of a difficult global economy due to the global pandemic and the near-negative return on cash savings, investors are turning to the crypto space in droves.
We have seen massive endorsements from institutional investors and big names like MicroStrategy, Guggenheim, PayPal and Square, all of which give legitimacy and ignite the flames of “institutional FOMO”. Bitcoin (BTC) has shot up like a rocket this year and has surpassed its all-time high thanks to this action by institutions. MicroStrategy alone bought more than 70,000 BTC in the past year, which shows continued positive support.
As adoption by institutional investors increases, so does the need for more sophisticated risk management methods that go beyond basic market mandates and allow professional and institutional traders to implement highly flexible and creative strategies that spread their risk across all assets and increase potential opportunities.
So far, such institutional quality products have not been the subject of cryptocurrency exchanges in terms of risk management. However, if we are to respond to the needs of this type of investor, serious exchanges must provide the infrastructure institutions need, including the ability to collateralise their positions and manage their risk more effectively.
Improved risk management for ultimate trading flexibility
Features such as uniform account management (also known as portfolio margin) allow traders to manage all of their accounts, trades and crypto assets via a single interface. More importantly, however, they should be able to unify all their assets and trade any instrument, using all of their purchasing power.
Suppose a trader wants to get into an ETH / USD futures trade. With a unified account, they can do this efficiently without having to buy Ether (ETH) and by simply using one of their existing crypto-collateral. This is much more convenient for traders and also reduces the fees for buying Altcoins with Tether (USDT) or BTC. This also allows them to take a much greater risk and position to grow their profits and improve margin efficiency significantly.
Risk management is probably the most important part of investing. If the crypto space is to continue to grow and to keep institutional traders interested and interested, we need advanced risk management tools that can maximize returns for investors – and bring crypto market capitalization to the trillion dollars, which it rightly ranks .
This article does not contain any investment recommendations or recommendations. Every investment and trading step is associated with risks. Readers should conduct their own research in making their decision.
The views, thoughts, and opinions expressed here are the sole rights of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Jay Hao is a tech veteran and seasoned industry leader. Prior to OKEx, he focused on blockchain-powered applications for live video streaming and mobile games. Before entering the blockchain industry, he already had 21 years of solid experience in the semiconductor industry. He is also a recognized leader with successful product management experience. As CEO of OKEx and a staunch supporter of blockchain technology, Jay believes that the technology will remove transaction barriers, increase efficiency and ultimately have a significant impact on the global economy.