Crypto traders are usually anxious to get into trading and start making money without considering their account size and how to manage their funds. As a result, it is common for beginner traders to gamble, looking for a jackpot, while having little regard for practices that drive consistency. If that sounds like you, it's time to look at some risk management practices that, if applied well, will protect you and help you stay in the market without blowing your account.

What Is Crypto Risk Management?

There is no doubt that you will experience negative events when trading crypto. By negative events, we mean trades that go against your desired outcome, unusual price spikes, mistakes, and many more unpleasant happenings. Risk is normal in trading; every crypto trader takes risks. Crypto futures traders take more risks because they tend to use leverage regularly. Not following due risk management practices affect your trading balance, and you can even lose all of your capital.

Risk management practices capture how you intend to manage your risk when trading. They protect you against the downsides of your trades and keep you in control of your losses. The rules will not only protect you, but they will also help you make the desired result when the right crypto trading strategies are in place.

8 Crypto Risk Management Practices

Below are some risk management practices that you should apply to your trades.

1. Have a Solid Trading Plan

One of the biggest mistakes you can make as a trader is to start trading based on your gut feeling or instinct. We cannot deny that you can get some positive results this way, but it can only be a result of luck and nothing more. You need a proper plan to manage your risk and get consistent results.

Your trading plan is your organized approach to trading. It is a system you have created through your experience in the market to give you the hedge and results you desire. Your trading plan should cover when to open trades, close trades, how much risk you should take per trade, your risk-to-reward ratio, and more. Having all these things planned out simplifies trading for you and helps you to manage your money well.

2. Only Invest What You Can Afford to Lose

This is an often overlooked aspect of trading because many traders wrongly believe nothing can happen to them and that they have everything under control.

The question is, why should you follow this rule? As a simple answer: because you can lose your capital. Also, trading an amount you cannot afford to lose will result in pressure and emotional stress, which can compromise your decisions, leading to more mistakes.

The crypto market is volatile, and it is better to trade only a small amount of your disposable income. It is painful to lose money and more painful when the money is meant for another purpose. For this reason, your trading capital must be expendable.

3. Size Your Positions

The idea behind position sizing is that you should measure how much you risk per trade. You should not risk 100% of your capital on a single trade. Successful traders prefer to risk a fixed percentage of their capital per trade.

Some trading experts recommend that traders, especially beginners, should not risk more than 1% of their account balance on a single trade. This practice will help you limit your risk and give you control over your trading capital. Some traders consistently risk 2% per trade, and some risk 3% per trade. Some also believe in not having more than 5% of their capital in open trades, no matter the number of opportunities they see.

Unexpected price swings happen in the market. If you risk more than you can handle, such swings could make you panic and push you into making irrational decisions.

4. Limit the Use of Leverage

Leverage lets you trade using borrowed capital. As a result, your profits can be magnified, but so can your losses. The latter raises the need to understand how leverage works, its impact on your trading results, and how best you can manage it.

Futures traders are often tempted to use very high leverage so they can make a lot of money. But unfortunately, they forget that a little mistake can also push them into deep losses.

5. Always Calculate Your Risk-to-Reward Ratio

The risk-to-reward ratio refers to the risk versus the potential return expected from a trade. You should measure the risk-to-reward ratio of a trade before executing it. If you can determine the potential result against the risk, you are more likely to go for trades with a high probability of success.

a screenshot of  ETHUSD chart

In calculating the risk-to-reward ratio, traders usually go for a ratio from 1:1.5 to 1:3. A ratio of 1:1.5 means that the profit target will yield an amount that is 1:1.5 times bigger than the risk. Any trade that ends at 1:1 is said to break even, as there is no profit or loss, while anyone that shows a less than 1:1 risk-to-reward ratio should not be executed.

6. Use Stop Loss Order

The stop loss order helps specify an exit point in the market. It limits your losses when a trade goes against your prediction. You will have losses at some point, and there is nothing you can do about it. You can control the losses by using a stop loss order every time you trade.

Some people believe they don't need to set a stop loss because they know the proper time to exit the market. However, they forget or do not know that the market is full of surprises and could easily get distracted. In addition, not having a stop loss order makes it hard to predetermine the amount you will lose in a bad trade.

Stop losses help you ensure you don't exit trades too early and miss out on potential profits. They also protect you from emotional trading and following cognitive biases that can lead to poor decision-making.

7. Secure Your Profit With Take Profit

Take profit works similarly to stop loss, with the main difference being that it is used to secure profit and not to stop a loss. The tool is designed to take a profit when the price reaches the specified point.

a picture showing a lot of money

Having a clear expectation for your trade profit helps you to predetermine the appropriate risk you should take. In addition, it will help you maintain discipline during trades.

8. Have Realistic Expectations

Having realistic expectations is key to managing your risks. You can't make a 40% monthly profit without risking too much of your capital. Having such a goal will always make you overtrade or use too much leverage, which could lead to massive losses. Setting more realistic goals will help give you control over trading emotions like greed, fear, and hope.

These Practices Are Important

Risk management is very important to do well at trading, and it should be taken seriously by beginner and struggling traders. As simple as they may seem, not putting them in place can make you struggle in trading.

The difference between successful and struggling traders is not always about the trading strategies employed but rather their simplicity. Successful traders are usually simple enough to follow their trading plans and have laid down risk management procedures that they follow consistently.

The information on this website does not constitute financial advice, investment advice, or trading advice, and should not be considered as such. MakeUseOf does not advise on any trading or investing matters and does not advise that any cryptocurrency should be bought or sold, ever. Always conduct your own due diligence and consult a licensed financial adviser for investment advice.