Volatility makes it challenging to predict how much or how little you should invest at once. This is why practicing proper risk management and position sizing is essential. Risk management is knowing how much you can afford to lose, and position sizing determines how much capital you should commit for each trade. Both skills are crucial for trading and investing in cryptocurrencies.
The number one rule of trading the markets is not to get greedy. It's tempting to try and get rich quickly by doubling or even tripling your investment, but it doesn't always pan out this way. Trades can quickly go the opposite way. If you are after long-term success, compounding smaller short-term gains can add up faster than you think!
Another mistake new traders make is getting too confident when things start going well for them early on. Over-confidence leads to investing more than they can afford, which can be disastrous. Keeping your emotions in check and taking profits aggressively as you see them is the best way to avoid this.
You know that euphoria when you're on a hot streak with Bitcoin? It feels great—you feel invincible—nothing can bring you down from this high. Not so fast, my friend—don't let those emotions get the best of you!
There is no guarantee that a winning streak will keep going. If things turn the opposite way, you will regret not having taken profits when they were there. That said, keep yourself in check and make moves based on technical analysis and fundamental analysis. This way, you set yourself up for success as a crypto trader.
We cannot stress the importance of having an exit plan for every trade. An exit plan keeps you from wasting too much time and money on a position that isn't working out.
Before entering a trade, ask yourself:
When should I cut my losses?
When should I take profits?
How will I know when it's time to move on?
A solid system in place will help you close a position with confidence as soon as there are signs of the market reversing.
The good ol' stop loss is our best friend when trading in a volatile market. By setting a stop loss, you automatically sell assets when the price drops below a certain level. Stop losses are beneficial because they allow you to exit without needing to watch prices all day long.
Not only do stop losses prevent you from losing too much money, but they are also significant for protecting your gains. They ensure you don't let them slip away after seeing some growth over time. Again, you can set a sale to trigger when the price of an asset hits a particular peak.
This is where risk management and position sizing connect. Separating pot sizes is the first step to managing risk. It ensures that your losses don't exceed a certain percentage of your total investment.
For example, if you have $5000 in crypto, then you could break it up into three pots:
$2500 for each of the top 10 coins by market cap (Bitcoin, Ethereum, etc.)
$2000 for each coin ranked between 11th and 20th by market cap
$500 for any other coins
Remember that diversification is key to maintaining a solid cryptocurrency portfolio!
Many people have made a fortune from investing in cryptocurrency, but more than 90% of them lose money at some point along their trading journey. Risk management and proper position sizing are paramount for successful crypto trading. You should always be aware of your exposure to risk and do what you can to mitigate it. It may seem like a lot of work, but these steps prevent catastrophic losses when making big moves with your money.
Learn more about risk management and how to properly position size by joining AR Collective today!