Risk Management for Crypto Currencies
Risk management is the corner stone of every trading strategy. The key to investing success is to make more than you lose without risking ruin. You need to spend time developing a strategy that helps you consistently.You want your crypto currencyrisk management strategy to flow down to each trade.
Creating Your Risk Management Strategy
The first step is to allocate capital. Your financial goals should be in tandem with the risk you are willing to take. For example, if you want to double your money, you have to be willing to lose at least half the money that you are risking. If you don’t want to lose any money, than your return will be the risk free rate of return. This is usually the rate you will receive with a government bill like a treasury bill. If you want a return that is greater, you need to take risk.
Once you allocate your capital, you need to determine your trading strategy which can also be multiple-strategies. For example, you might have a trend following technical analysis strategy where you buy and sell all crypto currencies when a moving average crossover is triggered. This could be for just bitcoin or it could be for 5 or 6 different crypto currencies. If you allocate all of your capital to a trend following strategy, you need to understand that your risk is concentrated and there is the potential for all the crypto currencies to move in tandem.
Another type of strategy might be a fundamental trading strategy. Here you would look for news to drive the exchange rate of a crypto currencies. This is a discretionary type of strategy where you are making all the decisions. This type of strategy is different from a trend following strategy.
One of your strategies might be a crypto currency versus a sovereign currencies such as the dollar or the Euro and some might be cross crypto currency trading strategies where you are trading one crypto currency versus another. You might use different technical indicators to measure how far one has drifted from another. The Bollinger band strategy as well as the relative strength index can help you measure this phenomenon.
Each strategy should have risk management measures in place. Since trends do not happen very often, you may want to take advantage of the trend and make more than you lose. You have to incorporate the fact that you might lose more times than you win, but you will sacrifice this to make more on winning trades then you would lose on losing trades.
Each trade you place has to have a take profit level and a stop loss. This makes sure you do not risk too much on any trade. You want to stick to the guidelines you put on place originally and understand that you will lose money on some trades and that is okay. By combining risk management on trades, with asset allocation on your strategies, you are creating a risk profile that is bound to succeed.