5 Effective Strategies to Minimize Risks in Crypto Futures Trading
Crypto futures trading, like all other asset classes, involves both risks and great profit-making opportunities. As a Futures trader, what you need are proper risk management strategies to maximize your profits and minimize your losses. Combining several technical analysis tools can hugely affect your trading decisions, but the truth is if you don’t have proper risk management tools in place, you might put your account severely at risk.
“Having had the money and losing it all on one trade position is worse than not having had it at all.” — This common turn of phrase sums up the risks associated with investing in the Crypto Futures Market. The cornerstone for a successful portfolio lies in appropriate strategies that detail your plan with clear blueprints of the goals to be achieved. Choosing the right strategies and making timely decisions with these strategies is what the game is all about. This article will explore 5 effective strategies to minimize risks in crypto futures.
What is Risk Management?
Risk management is the process of measuring or assessing risk and then developing strategies to manage the risk while attempting to maximize returns. This typically involves utilizing a variety of trading techniques, models, and financial analyses. The potential return from any investment generally depends on the amount of risk the investor is willing to assume. On this note, one key element of crypto futures risk management is managing leverage.
Understanding Leverage in Crypto Futures
Leverage can be a powerful tool, but it’s important to remember that it amplifies not just your potential profits but also your potential losses.
To illustrate this point, let’s say you’ve deposited 1000 USDT in your LBank Futures wallet and opened a 100x leverage position with your full deposit, giving you a total exposure of 100,000 USDT. However, the standard taker fee of 0.04% means that the cost to open this position will be 40 USDT or 4% of your account.
With this one trade, you need to already account for 4% of your overall profits and losses. If your position goes against you, your account balance will shrink even further, increasing your effective leverage. Plus, if you’re trading perpetual contracts, you’ll also face funding fees charged every eight hours, which could mean an additional 40 USDT daily deduction from your account balance, assuming a low funding fee of 0.01% (or 0.04% daily).
5 Strategies to Minimize Crypto Futures Risks
- Develop a trading plan
A trading plan is basically an outline of your plans for making a specific trade. At what point are you going to “get in”? At what point are you going to “get out”? But what if some new development arises? Will you still stick to the particular plan that you have developed for yourself? Of course, you won’t… If news hits the airways that something major is about to happen, chances are you will want to adjust your plan to either capitalize through profits or reduce your chances of loss.
As a result, it is imperative to set realistic expectations and test your plans when developing your trading plan.
2. Avoid revenge trading
Revenge trading is a common response to a significant loss that is driven by emotion. Traders who engage in revenge trading often enter into another trade immediately after experiencing a big loss, without taking the time to assess their strategy or consider their next move.
The aim is to recover the loss quickly, under the assumption that placing another trade, which is anticipated to be profitable, will help recoup the losses. However, the market is notoriously difficult to predict, and the anticipated winning trade may often turn into a losing one, which is potentially even a larger loss than the previous one.
3. Practice your trading
Practicing your trading before risking real money on crypto futures can help you gain valuable experience and develop your trading skills. With a practice account, you can test different strategies and methods and choose the one that suits your trading style. You can as well learn to navigate your chosen trading platform and get more acquainted with the market and its movements.
4. Use risk management strategies.
Stop loss is a crucial part of any risk management plan, as it’s the point at which you decide to exit your position completely. Stop loss is a safety measure used by traders to prevent excessive losses — usually found with configurations in “long” or “short.” If the outcome of a trade comes out as adverse and losses are incurred, the stop loss will kick in and stop the trade at a predetermined point set by the trader. The main aim of this stop is to minimize your loss on every transaction to a definite maximum amount.
5. Position sizing
This refers to the amount of cryptocurrency, long or short, you are willing to lose based on the maximum amount of value acceptable if the trade doesn’t go your way. This is sometimes called “max risk.” As a beginner, it’s generally recommended to limit your max risk to 1–2% of your portfolio for short-term trades and 5% for longer-term positions.
For example, let’s say you have a $1,000 crypto account, and you want to buy a token that’s currently priced at $10 per token. You’ve decided that your max risk is $20, or 2% of your account, and you’ve set a stop loss at $5. Based on these parameters, your position size should be 4 units. If the token’s value drops to $5 and you exit your position, you’ll lose $20, which is within your predetermined max risk.
Trading crypto futures can be extremely lucrative because of the leverage it offers. However, traders must possess an understanding of how it works and strategies for reducing associated risks. LBank Futures promotes responsible trading practices, which include forming a trading plan and using risk management tools such as stop loss and taking profits.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.