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Risk management in Crypto trading

Do not underestimate the importance of the core Risk Management principles. Portfolio management and Trading are about discipline, patience, self-control, and skills enhancement

😊  Emotional control

Some traders still underestimate the importance of emotional control. There is a large study called “Behavioural Finance”, which examines psychological aspects arising from active portfolio management and trading. Your mood can have a great impact on the trading decisions you make.

There is a statement “The way you start your day determines how well you live your day.”  So make sure your mind is not being negatively disturbed by some external factors, like unsolved conflict situations, upcoming exam anxiety, etc. When you find yourself emotionally distracted, you can quickly lose your concentration, which is the key when it comes to decision making in trading and investing. There are many ways of how you can temporarily distance yourself from real-life issues or distractions.

Meditation can be a solution, but not for everyone. Anyway, the idea is that you should use all available psychological tools to increase your concentration and to calm the mind when you feel that your thoughts are messed up, and the brain is buzzing. Otherwise, your risk management is under threat.

💲   Risk calculation

The vast majority of people are well aware of Excel as it has become a popular software used in professional and daily life. You are not required to be a guru in Excel to make simple risk management “manoeuvres”. All you need to know is how to make a simple table where you can play with asset allocations, cryptocurrency conversion calculations, etc.

Here is how you can come up with any proportionate asset allocation depending on the available balance (check the screenshot below).

On the left side, there is a table with chosen coins, which are classified by “1 Class”, “2 Class”, “3 Class”. The idea of classification is nothing more than just a product of your creativity. Notice, that investment allocation varies from 2% up to 10%. Basically, this represents the percentage out of your total balance that you are willing to risk on a chosen asset. You can sort by, classify, organize diversification anyway you want.

Asset Allocation Example

That’s what is called planning.

Afterwards, execute the trades according to your asset allocation plan using Bitsgap “Portfolio”, where you can track your portfolio dynamic. In this case, “ROI” is what should grab your attention. The total ROI indicates the overall return on your investments since the very beginning of your trading via Bitsgap.

For Bitmex gamblers, I developed a special calculator, which allows you to estimate the exact trade size for a chosen risk level, leverage, and liquidation price. The calculator has all the things that are missing in Bitmex original calculator. Try it:

📝  Trading journal

Keeping track of your trades is essential. Tracking allows you to spot your weaknesses and strengths. When you know which trades bring you the most profits/losses, you can study the reasons. As you dive into the due diligence process, you reveal many interesting trade patterns.

For instance, it may turn out that you are very good at trading altcoins rather than Bitcoin. Another example can be that you are bad at trading on Friday and Saturday (maybe these are the days you get mostly distracted by your family members). The reason for your underperformance might also be the fact that you are mixing with too many trading strategies, rather than sticking to 1 or 2 strategies that you are good at.

Everything is strictly individual, and to sharpen your trading skills, you must work hard on your strengths and weaknesses. A rule of thumb is to enhance what makes you profitable.

〽️  Stop-loss

Focus on basic things, like making sure that you are using a stop-loss mechanism, which secures your deposit.

While analyzing your trading journal, you may find out that in most cases you had significant losses just because you forgot to set a stop-loss. Some traders tend to hold onto losing trades for too long, constantly moving the stop-loss far away from an initially defined level of risk. Simply, because psychologically, it can be hard to admit that you are wrong about the price direction.

Trading must be rational and emotionless. Stick to your trading plan and execute risk management tools accordingly.

Watch the GIF

⚖ ️   Diversification

Despite an indisputable fact that almost all existing cryptocurrencies are highly correlated to Bitcoin, achieving asset allocation diversification is barely possible. However, trading strategies diversification is an option. You may mix with passive and active portfolio management tools. A margin-funding can be considered as a passive strategy. MF is a fixed income strategy that pays you interest as you let leveraged traders use your capital.

Currently, on Bitfinex, there is a decent variety of coins that you can lend. For instance, a daily interest for USD is 0.021%, which is 0.63% monthly.

Note, that this rate is fluctuating and depends on the demand curve. Historically, a USD monthly rate was 2% and even higher. So this is definitely worth of consideration.

👨‍🎓  Education

It sounds as a cliche, but through education and practice, you can become better at trading. The market is constantly changing, meaning that your today’s trading strategy can become obsolete tomorrow.

Learn new strategies, automated trading systems like Bitsgap SBot, define and stick to your risk management if you want to evolve together with the market. Practicing with different strategies is also the key.

For instance, in DEMO mode, which is available on Bitsgap, you can execute trades without risking any real money. If you haven’t tried scalp trading, high-frequency trading, swing trading, then DEMO is a perfect mode to learn new skills.

Written by Dmitri Perepelkin, Bitsgap analyst


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