Risk management is an essential element of success for any trader in any market. Regardless of the size of capital you trade or invest in, losses will be inevitable, especially in highly volatile markets such as cryptocurrency. Learning how to manage risk to minimize losses is essential. But it is also necessary to master risk management to ensure maximum profit. After all, the more you are willing to risk, the greater the potential reward.
Risk management to prevent losses
Even experienced traders with an impressive track record of reading the market can lose it all on one or two bad trades if they don’t practice proper risk management or get their emotions in the way. The temptation to hit the jackpot or chase market sentiment can be too strong, which can make traders clouded or overconfident.
To avoid big losses and keep traders cool to trade, at the very least the very basic trading tools and forms of risk management should be used. These include creating trading rules such as market orders, limit orders and stop loss orders, which allow traders to limit their losses by taking an action when certain conditions are met.
Mechanisms like this allow traders to take a break from the screen and trade with confidence knowing that they can limit their losses or make a profit at an acceptable level. Which limit this is depends on the investor’s risk appetite and the amount of capital he is willing to lose in a particular trade.
Of course, another way of managing risk is the golden rule of always keeping a diversified portfolio spread over multiple assets. This allows you to gain exposure to more assets while hedging losses and ensures that one bad investment doesn’t wipe out all of your capital.
Risk management to maximize your profits
Last year in the cryptocurrency space we saw astronomical growth with astounding gains from most of the major coins. Decentralized financing sparked a passion for yield farming and earned an attractive passive income on crypto assets, enabling an entire ecosystem of borrowing and lending beyond traditional financing. Against the backdrop of a struggling global economy due to the global pandemic and a near negative return on money savings, investors are turning en masse to the crypto space.
We’ve seen massive statements of support from institutional investors and big names like MicroStrategy, Guggenheim, PayPal and Square, all lending legitimacy and fueling the flames of ‘institutional FOMO’. Bitcoin (BTC) has skyrocketed this year and has shot through its previous all-time record thanks to this action by institutions. MicroStrategy only bought more than 70,000 BTC last year, with continued bullish support.
And as adoption by institutional investors grows, so does the need for more sophisticated ways to manage risk that go beyond standard market orders and enable professional and institutional traders to execute highly flexible and creative strategies that overcome their risk. spreading all assets and enhancing potential rewards. .
Until now, such institutional quality products related to risk management have been beyond the reach of cryptocurrency exchanges. However, if we are to respond to the needs of this type of investor, serious exchanges must provide the infrastructure that institutions need, including the ability to collateralise their positions and manage their risk more effectively.
Improved risk management for ultimate trading flexibility
Through features such as unified account management (also known as Portfolio Margin), traders can manage all of their accounts, transactions and crypto assets from a single interface. More importantly, they can pool all of their assets and trade with any instrument, using all of their purchasing power.
For example, say a trader wants to enter into an ETH / USD futures trade. With a unified account, they can do this efficiently without Ether (ETH) and by simply using their existing crypto collateral. This is much more convenient for traders and also lowers the costs associated with buying altcoins with Tether (USDT) or BTC. It also allows them to take a much greater risk and position to bolster their earnings and significantly improve margin efficiency.
Risk management is probably the most important part of investing. As the crypto space continues to grow and attract and retain interest from institutional traders, we need advanced risk management tools that can maximize returns for investors – and push crypto market capitalization to the trillions of dollars where it rightfully belongs.
This article does not contain investment advice or recommendations. Every investment and trade move carries risks, readers should do their own research when making a decision.
The views, thoughts and opinions expressed here are the sole ones of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Jay Hao is a tech veteran and experienced industry leader. Before joining OKEx, he focused on blockchain-driven applications for live video streaming and mobile gaming. Before hitting the blockchain industry, he had solid experience in the semiconductor industry for 21 years. He is also a recognized leader with successful experience in product management. As CEO of OKEx and a strong proponent of blockchain technology, Jay expects the technology to remove transaction barriers, increase efficiency, and ultimately have a substantial impact on the global economy.