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  • by Aytan Jalilova
  • Jul 22, 2022
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Importance of risk management

Hello friends! Today, We would like to write a small article about risk management, which is one of the most important issues that we all suffer from. Risk management is probably one of the most important aspects for any trader or investor. However, due to the wave of uncertainty and instability in cryptocurrencies, this issue interests us even more. While investing in any value/currency, you can predict what will happen tomorrow, but this is not possible in the crypto market.

 

If you ask about what is the importance of risk management?

We can say that correct risk management will be responsible for at least 50% of your success. There is no fixed rule about risk management because everyone's budget requires a different setup of risk between the amount they can win and the amount they can lose. In short, you need to build these factors according to your attitude, plans, mood, and goals. The risk that you will take and the risk that someone else will take will differ in this context, and your risk management will be shaped differently. In this article, rather than telling you what to do, We will share some of the ideas that may be interesting from trader experiences.

 

What is the reason to lose all profits in trading?

The first thing that causes a trader to lose all his profits is greed rather than inexperience. When your asset in your portfolio starts to rise, the thought that it may fall goes out of our minds. You check Twitter and everyone starts saying "moon", a lot of news spreads that this "pump" can continue, your choice is so good that you make yourself believe that this project will change the industry from top to bottom (maximalism), the volume is constantly increasing and it becomes unstoppable. Reality always is a definite situation in this regard; THIS SITUATION WILL ALWAYS END. There will always be a fix, a BTC drop, FUD news, hacks/bugs on exchanges. So if you are trading, ie not holding coins long term, you should sell at the top according to you, depending on the “pump” fuel and your target profit rate

You can choose to sell most coins that went up a little more than 30%, but you should consider that each coin is a different world. Sometimes you expect 10% profit and some 1000% profit and you take your position accordingly.

 

How should you react according to the current price and situation of the coin?

  • Volume
  • Reactions on social networks
  • Whales' reactions during coin movements

 

But here is always important one thing; you have to sell this coin while the coin is on the rise. DO NOT WAIT to sell at the top because this will NOT happen. If you won't be able to witness this bullish rally live (work, vacation, individual more important things to get done, etc.), manage your sell orders according to your expectations and consider the resistance levels to be slightly lower than the previous resistance. The percentage of sales you will make should depend on your intention for the coin. The only tip is if you trust a coin or see a future in it (investor/investor thinking), you can choose to never completely exit that coin. Here the recommendation is to leave at least 10% of profit or profit in that coin because you never know what will be in the future. This can have a lot of benefits or might not but you already know that you have taken your profit. This is a situation that is completely shaped by your risk management.

  

A diagram summarizing Bitcoin's volatility relative to other values

Another important point about risk management is the variety and size of your portfolio. This is a very long topic, but we will explain some of the key points. The first and obvious point is no matter how awesome it looks, how promising, how shiny,  NEVER go into that coin with all your money. There may be a trap, the project may fail, BTC may fall, a momentary demolition or FUD may kick in. NEVER go in with all of your money. A good portfolio should consist of at least 4+ coins. Its limit is the amount you can “control” by making an appropriate observation on your part. Once you saw that you have 20+ coins whether that creates a mess is another matter, or whether most of it has been going on for a long time, everything needs to be under control. It is also an essential recommendation for your mental health and stress-free life. Invest in as many coins as you can follow, and make an exchange attempt. Of course, like everything else, this can change depending on how much you devote yourself to this job, but in general, order is important for a healthy life. Order is EVERYTHING.

The other point is always not to put more than 20% of your portfolio on the crypto exchange in the same coin. If the value of a coin is constantly growing, you can take 10-15% of the profits from it and look for coins that are not yet undervalued to distribute the profits. However, while doing this, keep in mind always to stay in balance. 

You can even create your fixed rule about how to realize your profit like:

  • by investing 10% of your profits in GOLD,
  • 30% in BTC to collect altcoins from the bottom in the dumps that come with distressing and sudden news, and
  • the remaining 60% in the same coin or a better coin that will give an opportunity in the future.

 

Especially the first two are very important because they prepare you mentally and economically for new situations for harsh and difficult scenarios. It's tempting to reinvest all your winnings into other coins, and the payoff can be great if you're lucky, but smart money management should always be one step ahead. And these things are systematic and can be applied to EVERYTHING, not just the crypto exchange.

In short, instead of trying to adapt the market to our desires, we should adapt ourselves to the market.

And let us give a friend’s advice. Do not bury 100% of your money in the crypto market. Although we are in a community where the claims that blockchain technology will destroy and destroy the dollar are flying in the air, the truth of the matter is that it will not happen that fast.

It is very important to dream, desire, and win by directing your ambition to the right place, but sometimes being realistic prevents you from being destroyed by dreaming and helps you to ensure your psychology.

 

The authors of the articles on this site cannot be held responsible for your investment decisions. In addition, every investment and trade movement involves risk. That's why you should do your research when making a decision.