Risk management is a critical aspect of responsible investing and trading. You can not play long-term games in the market unless you safeguard your position and minimise your risks.
Your portfolio should have a minimum exposure to very risky assets so that everything is not wiped out in the case of an unlikely event.
There are several approaches to lowering the overall risk of your portfolio. You can diversify your assets, hedge against financial events, or use stop-loss and take-profit orders, etc.
Risk Management Strategies:
Risk management comprises anticipating and recognising the financial risks associated with your assets in order to mitigate them. Investors then use risk management strategies to help them manage the risk exposure of their portfolio.
After recognising investment risks, traders and investors employ risk management measures, which include a variety of financial practises.
1. Stop-Loss Orders
Given the volatile nature of cryptocurrencies, you need to have an exit strategy even before you buy a digital asset. An exit strategy is essentially a predetermined price at which you will sell your assets. It can be on either the lower or upper side of the spectrum.
Stop-loss orders allow you to sell your cryptocurrency automatically if it hits a set price, reducing possible losses. It is a simple but effective way to reduce the danger of huge losses. You can programme limit orders to automatically trigger at your limit price, whether you want to profit or set a maximum loss.
Rather than putting all of your eggs in one basket, diversifying your portfolio by investing in a variety of different cryptocurrencies is one way to reduce risks.
A diversified portfolio will not be heavily invested in any one asset or asset class, reducing the risk of large losses from a single asset or asset class.
3. 1% Rule
According to the “1% rule,” you should not risk more than 1% of your total capital on a trade or investment. So, if things go sideways, even if the value of that asset goes to 0, your financial stability is not compromised.
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4. Managing Emotions
The market is driven by investor sentiment. That’s why we have a bull market and a bear market. It is very important to stay aware of your own emotions and not become a victim of FOMO (Fear of Missing Out) or panic selling.
You will have to develop a sense to recognise fear and hype in the market and avoid getting speculations and emotions mixed up with your investment decisions.
Nothing beats hard-core, in-depth knowledge and understanding of an asset before you decide to invest in it. Getting the fundamentals right is the first step to success in the market. That is why you should DYOR (Do Your Own Research).
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