The 3 Step Approach to Crypto Money Management and Risk Control

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[vc_row][vc_column][vc_column_text]Cryptocurrency trading is very profitable when done right. However, if done the wrong way, you can suffer unimaginable loses, some which can never be recovered. Therefore, there are good trading habits which any trader should practice by heart and make it their traditions.

One of these habits is having a money management plan. Money in cryptocurrency, just like in any other profit-oriented business venture, is a valuable asset which should be handled critically using a money management strategy. 

So, What is money management in crypto trading?

Money management is a financial strategy which determines how a trader is going to invest his money in different cryptocurrency assets. Trading is not like gambling. In gambling, losers are advised to spend more to regain whatever has been lost; however, in cryptocurrency trading, the opposite is true.

Money management determines when a trader is going to enter into a trade, how much volume he is going to purchase, and at what point should he pack his bags and call it a day. Money management helps you cruise smoothly through the trading pressure in the financial markets. It teaches you patience and tolerance.

Lastly, money management states the risks undertaken to perform a particular trade and the profits and losses that is associated with it. Here is a 3 steps approach to crypto trading.

1.   Setting Risk Tolerance

Risk tolerance is the amount of money that you are ready to part with from your account without affecting your future trades. As a trader, you should only put out what you are prepared to lose. Putting too much at stake can be devastating in case of a bad trade.

In the finance arena, risk tolerance is described as the degree of variability in returns of an investment that an investor is ready to withstand.

Factors affecting Risk tolerance

These are the factors you should pay keen attention when setting a risk tolerance level.

  • Time horizon; investments can be short term or long term. Remember, short time frame investments carry a higher risk than long term frame investments.
  • Your future earning capacity; how will the trade impact your future financial capabilities
  • Presence of other supportive assets; this includes but not limited to properties, pension, inheritance, or social security. The more back up assets you have, the higher your risk tolerance level.

Risk tolerance can be classified based on their risk levels. There are three risk tolerance levels;

Aggressive Risk Tolerance

Trading experts and pros have aggressive risk tolerance in their guts. Individual traders and institutions that have resources and experience to carry in-depth analysis can invest in volatile markets with high risks. This group of traders can be classified as aggressive.

Moderate Risk Tolerance

These investors approach balanced risk vs. rewards investments. They take medium time horizons and combine riskless cryptocurrency assets with less volatile options. Such investors are the right investors in dividend-paying companies.

Conservative Risk Tolerance

This is mainly newcomers in the trading industry. They prefer established assets with negligible volatility levels. These are mostly retirees or young investors with little or no backup assets.

2.   Stick to and Follow your Trading Plans

This is a crucial strategy. A majority of new traders will toss their plan in the trash can when the hell breaks loose, and they lose a couple of trades. The panic associated with making wrong trades is closely followed by a set of revenge trades where a trader seeks to regain what he has lost by carrying uncoordinated trades. The result is often more losses.

Therefore, it is essential to stick to your plan. You are advised to write down your strategy on paper and stick to it. The written note should not be changed and should be adhered to religiously.

Your written note should include clear exit points. In case you lose, do not alter the stop loss point in the hope of recovery, unless it is provided in your strategy. Secondly, you should highlight all the levels at which you plan to enter new contracts, and the volume desired, in case of a favorable outcome.

This money management strategy is the hardest for all traders. The moment everything goes red, panic kicks in. Not many can withstand the thought of losing money and ultimately give in to pressure. If you can master this strategy, combined with the other two, then nothing can stop you from making a kill.

Lets us look at our final strategy

3.   Establish a Pain Threshold

After setting your risk levels and have a layout for each of your trades, the remaining part is setting your pain threshold.

Well, on a bad day, the market can give you a fair share of its punches. This is where the pain threshold comes in.

Pain threshold is the level at which you stop trading after continuous losing. It is unwise to fight the market back. You will lose again and again.

Every trader has a bad day. And a string of loses and a row of red on closed investments can rattle your nerves, whether you are a newbie trader or seasoned trader.

How does this work?

Take, for example; you have an account balance of $10000 at the start of the day. You set your pain threshold on the percentage of your account balance you can lose before retiring for the day. Lets say 10%. Therefore, if you lose 10% of your account after a series of bad trades ($1000), then you can shut down your computer and get a hobby until the next day. You can as well take a week off to review your strategy and see how best you can tweak it.

The smaller the risk tolerance, the lower the chances of hitting the pain threshold. However, you should be disciplined enough to live that seat until the next day. In very simple words, know when to take a break!

Conclusion

Developing a money management strategy in crypto trading is simple and easy. However, the hardest thing is self-discipline. Get your head in line, and you will wade into the pool of profitable traders.


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