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Risk management when trading crypto

With the expansion of a derivatives market, cryptocurrencies had become a great diversification tool, given their low correlation with other asset classes. Due to the innovation brought by technology in the world of finance, an increasing number of people are now attracted to invest in Bitcoin, Ether, Litecoin, and other smaller altcoins, to not miss the train and be part of the revolution that's currently going on in the financial industry.

Particularities of trading cryptocurrencies

However, despite trading cryptocurrencies resembling how FX, stocks, indices, and other assets are traded, it would be a mistake to not take into account that there are several important particularities. First and foremost, due to wild daily fluctuations, crypto assets are currently some of the most or maybe the most volatile trading instruments. Lack of industry regulation and the subjectivity for price manipulation are two other factors to account for. Considering that these could have a major implication on the trading performance, risk management should be approached differently.

Placing a stop loss

Most of the online courses and educators constantly say how we should place tighter stop losses to minimize potential damage to our account, while also increasing the risk/reward ratio. Given how volatile crypto assets are, such an approach could lower the overall trading accuracy and thus increase the number of losing trades.

Liquidity is very thin and that means fewer orders are being placed around key support/resistance areas. In the absence of order flow to defend a particular zone, the price action could turn out to be very choppy, triggering the stop losses, before moving impulsively in the other direction.

As a result, trade sizing should be adjusted downwards and stop losses increased. By doing so, the risk on a percentage based on one’s account will remain the same. At the same time, the chances of being wiped out of the market are smaller.

Using dealCancellation

Tackling the challenges of the crypto market should gradually become bearable given that brokerage companies are constantly innovating and providing additional risk management tools for their customers. It is the case with easyMarkets, a reputable trading provider, that had developed and improved dealCancellation, an innovative tool that enables traders to undo losing trades for 1,3 or 6 hours, in exchange for a small fee.

Whether it is for hedging already opened trades, testing strategies, or to have protection when volatility spikes, if dealCancellation is activated before placing the trade, a portion of the loss will return to the client. Learn more about dealCancellation on the easyMarkets website.

Trade frequency

Volatility combined with a high number of trades results in lower accuracy. As a result, cryptocurrency traders must be very selective with all the trade opportunities they encounter and reduce the trade frequency. That way they’ll be able to conduct an in-depth analysis and have more time to decide whether it’s worth taking the risk. Overtrading is one of the most common mistakes among beginners. Trading crypto should be a rules-based activity and traders must resist the temptation to open trades that don’t meet all the requirements of their trading strategy.

22 Apr 2020 17:40