Four (4) Risk Management Strategies To Consider During Bear Market
Oftentimes, crypto investors take risk management strategies for granted. This may be a result of the famous idea that handling the crypto market is all a game of odds. While the bear market may present unprecedented moves, believing that nothing is within your sphere of control is the fastest route to considerable losses.
It’s as if you are exposing yourself to the dangers of unforeseen market forces. And If this is an accurate description of your investments, then you are just as likely to make profits on a gambling table.
The truth is that there are two things that you can control. These are your trading psychology and your market risk management rules. This guide will focus on what risk management entails and highlight four strategies you can employ to minimize your investment risks.
What is risk management?
Risk management involves estimating how investment risks can be managed while holding a position. It’s a tool that allows you to handle the risks per trade efficiently. The most common form of risk management is position sizing, which involves determining the quantity of an asset that is going to be traded. It also involves setting stop-loss orders in advance so that you can avoid unexpected big losses.
Overall, Crypto Investment Risk Management involves; estimating the nature of the risk that you are taking with each trade, how much you are willing to lose while holding a position, and implementing stop losses or exit (take profits) techniques for your trades. Its main goal is to handle losses.
Have a Solid Trading Plan
You don’t want to start your trades based on mere feelings. One of the keys to trading success is having a plan and then implementing that plan accordingly.
A trading plan involves identifying and trading cryptocurrencies based on variables such as time, risks, and expected profits.
Typically, a good investment plan gives positive results and reduces the number of margin calls and losses. With a trading plan, you are able to grow and adapt, so emotions don’t take control of your whole trading, regardless of the outcome.
Calculate Your risk to reward ratio
A risk-to-reward ratio compares the potential rewards with the potential loss. Risk is calculated by estimating the price movements between the entry price and the predicted price at which you want to exit the market in case of a losing trade. And Reward is in the case of a winning trade.
It’s important to always know your Risk to Reward Ratio before entering a trade. Usually, most traders go for a ratio of 1:2. However, there is no fixed rule to the risk-reward ratio you can use.
Diversify your portfolio
One way to minimize your potential losses is to diversify your crypto holdings by investing in cryptos with different use cases, market capitalization, and different blockchains. Usually, a crypto with a larger market cap is considered more stable and has stronger backings, but a crypto with a smaller market cap might be less stable. It’s important to invest in both Large, Mid, and Small market capitalization.
For example, you can buy and hold bitcoin and Ethereum as large-cap, buy Cardano as mid-cap and then consider small-cap crypto assets, including Compound (COMP). At the same time, you can diversify with use cases and keep metaverse, gaming, lending, and payment coins.
You can easily trade all these coins on LBank. The platform offers seamless access to trade thousands of cryptocurrencies at minimal fees.
Only Invest What You Can Lose
Always follow the golden investment rule. Do not invest more than you can manage to lose. While the above rules can help you mitigate losses, it’s very important not to go beyond more than a loss you cannot withstand.
Wrapping Up
Don’t Expect a Miracle; there is no holy grail of trading. The goal is to use risk management strategies to help us minimize our losses. The strategies presented here also boost your earnings. For example, via portfolio diversification, you can still expect profit if one cryptocurrency fails and your investment goes all the way to zero.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.
