Whether it is your first move into the crypto market or a professional, knowledgeable about the market plays a significant role. If you wish to trade successfully in Bitcoin or other cryptocurrencies, you need to analyse the risk. Some traders take a hit every time but having a potential risk management strategy in place will make you be in the game for a long time, specifically when you trade in bitcoin.
Let us first assess the risks associated with Bitcoin and other cryptocurrencies!
Risks associated with bitcoin & other Cryptos
The crypto market is extensively volatile, and the fluctuations in price are quite high. People are often hesitant about investing in it due to its volatile nature. Besides, there cannot be exact reasoning behind the cause of this volatility or fluctuations.
Transactions are irreversible
A transaction happens instantly in a matter of minutes. The transactions once performed cannot be reversed until and unless the other person can do the same willingly. The transactions are anonymous, and there the risk of irreversibility is high.
Cryptocurrencies are decentralized and not backed by any government or financial institutions. However, the financial markets are quite safe as they are centralized backed by regulating authorities who persistently strive for the safety and interest of the investors.
Mitigating the risk of bitcoin trading
#1: Safeguard yourself from counterparty risks
The risk of the counterparty is common in the cryptocurrency market as there are issues with the exchanges, although they have a few gain profits. There is an endless list of crypto exchanges that are losing money and getting hacked, unlike ethereum-trader.app, which is highly trusted among traders and investors. You should never trust an exchange with your private keys while trading in Bitcoin, as the transactions cannot be reversed.
We can take a few steps to mitigate the risk involved with counterparties, such as:
- Never leave your coins on an exchange when you are not trading actively
- Only use 20-30% of your portfolio to trade
- Distribute your coins amongst several other crypto exchanges
- Assess and evaluate the exchange to ensure its authenticity.
#2: Trade with Quality & not with Quantity
Traders often tend to waste their time and money on overtrading. The main element to trade effectively is to choose quality and not Quantity. You need to understand the market condition to make your strategy effective. Wave trading works effectively during strong trends, while automated scalping is efficient within stable markets.
First, you need to identify the trading style that works best for you, and secondly, determine the proper market conditions. Understanding the two scenarios will help you locate the quality trades.
#3: Be Prepared with an Exit Strategy
Pinpoint the main support and resistance levels on the charts and make sure that you map out the trades well ahead of time. Identify the risk to reward ratio and set your targets to bag in the profits. Traders can lock their profits by scaling out in their path or adding their position during the high trends.
You need to ensure to set stop orders for protecting yourself when the market turns against you. Understand that the stops are not always powerful as the price moves rapidly, and you may get a negative fill due to shortage.
#4: Don’t use Imprudent Force
Traders use margins since it elevates the size of the order, allowing flexibility to become short or long. With that said, if you use forceful trades, then you will not have enough time to assess, which eventually leads to your failure of the whole principle amount under forced liquidation.
A few exchanges offer leverages as high as multiples of hundreds, but a 1% move against you will be sufficient to pull down your account. It is wise to use leverage in the multiples of 3’s as it will allow you to bag in more gains offering you sufficient buffer time to exit from an adverse trade.
#5: Keep away from Hype
FOMO, or the Fear of Loss, is the trader’s foes. Half the battle is won with proper management of emotions and being objective. Becoming extensively greedy may make you land in purchasing tops, and you may cash out of your rank at the bottom of the funnel with panic sells.
Unusual Hype at the peak of the trade may mean that a downtrend is soon to follow as the market reaches its distribution phase. Step in before the herd and sell into stability when Hype is at its epitome.
This overview on crypto trading, the risk and the benefits will be of great help when you plan your investment in the crypto market.