“Every battle is won before it’s fought.” — Sun Tzu
The main idea behind this quote is, that good planning and executing your strategy are essential for success.
What is true for battles also applies to cryptocurrency trading. And as a new trader in this space, there are many enemies to fight: price crashes, FOMO, FUD, security breaches…to just name a few.
For many newcomers in the space, the first time they buy a cryptocurrency they might buy something just because of FOMO, hold on to it for too long and lose a lot of money in the process. After such an experience, some never come back to crypto.
To spare yourself the experience of losing a lot more than you can accept, we’re going to guide you through some basics of risk management. While you might think crypto seems more like a gamble sometimes, it doesn’t have to be and with some planning, you can ensure that you won’t lose more than you can take. Just one more thing, the earlier you recognize that losses are part of the crypto rollercoaster, the earlier you can start to accept and hedge against them.
One general wisdom that is true when it comes to trading any kind of asset is to only invest small portions of your investable capital and to not go all-in on one trade.
Small trades go a long way
Let’s assume you have $1000 for investing and you put it all into one trade.
A) If you lose 50% of it twice in a row, you would be down to $250.
B) If you won 50% twice in a row, you would turn it into $2250.
In case A it will be really difficult to get back to where you started, as getting from $250 to $1000 would be a 300% increase and let’s not even think about getting it all the way increased to $2250. (We don’t say it’s impossible, it’s just not very easy 😉)
In comparison, if you use only 5% chunks of your investable capital you can afford to lose a few trades along the way. If you lose $50 out of your $1000 getting back to $1000 will be an increase of a bit more than 5%.
Logically, with smaller trades, it could take you a bit longer to increase your $1000 to $2250 but you will have more opportunities to make gains and avoid losses.
Plan ahead — trade the plan
The success of traders is often dependant on their ability to plan and to execute their strategy, especially in Crypto, where FOMO and FUD are very common and price movements are big.
2 things you will want to define before entering trades are the price points at which you
- Take Profits
- Realize Losses
Let’s talk about the less pleasant part first. Realizing losses. As human beings, we all have some sort of loss aversion. This means we would do a lot to avoid losses and on top of that, we will feel a loss twice as much as a gain. Therefore, it can be hard to experience how an asset you believe in is decreasing in value. Often emotional traders hold onto these losers for too long and take more loss than they needed to.
To manage your cryptocurrency trading, define a point at which you will sell a cryptocurrency. Let’s say you bought 1 Bitcoin Cash when it was at $380. You are willing to realize a loss of $80 on it, meaning if it drops to $300, you would sell. Luckily these days, you don’t have to do that manually. You can simply put up a Stop-Loss order on your exchange. This order will only be executed once the specified price is reached. For the sake of Bitcoin Cash, we’re hopeful that it will stay above $300 for a bit.
Much nicer than realizing losses is it to take profits. To go with the above example, you might be very optimistic on Bitcoin Cash and believe that it goes up a lot more in light of the upcoming halving. Since you’ve defined you’re willing to take an $80 loss in case it goes down, you could decide for yourself to take profits when Bitcoin Cash hits $480 and you have made $100.
Once you have set up your trading plan, stick with it. This is the best way to prevent you from making emotional decisions. And to keep track of how your trades are performing, you could start a trading journal to see what has worked well in the past and what hasn’t.
One more little remark when it comes to planning, in the above example we just intuitively decided upon how much profit we would like to have and how much we are willing to lose. Most likely you would probably also use technical analysis to identify key resistance and support levels before deciding on your limits.
It’s all about Diversification
Diversification is protection against ignorance. — Warren Buffet
For many the first cryptocurrency they ever invest in is bitcoin. This is not surprising considering its worldwide publicity. However, if you are serious about your trading, putting it all into just one currency exposes you to a lot of risk.
Therefore it is key to diversify your trades. If one cryptocurrency goes through a huge decrease in price, you might be able to make up for it with other trades you have in currency X, Y, Z.
To sum it up, a quick TLDR
- Don’t go all-in, make small trades and more of them.
- Plan ahead: before entering a trade define at which point you take profits and realize the loss. Use stop-losses so you don’t have to worry about trade execution
- Stick to your plan, don’t let emotions get in the way with your strategy
- Diversify, diversify, diversify
Last but not least, one more tip for beginners, leave leverage to the professionals. While it seems tempting to use leverage, one trade gone wrong with 50x leverage can easily wipe out your returns of months. So just make use of it if you are really confident in your trading skills.