The Art of Risk Management in Crypto

Today, we are going to focus on a very important subject that is vast and runs as deep as the rabbit hole. It is the cornerstone of your trading strategy and the foundation of financial theory and portfolio management.

Yes! We will be discussing the risk-return relationship in this article. First, we will first analyze this from a macro perspective before focusing on its direct implications in active trading.

Let’s go for a ride!

Disclaimer: Our content is intended to be used and must be used for informational purposes only. It is very important to do your own research and analysis before making any investment based on your personal circumstances.

What is risk?

Simply out, in financial theory, risk is uncertainty. In models where the return is mainly based on the mean, risk will be represented by the variance.
The relationship between risk and return is the foundation of Modern Portfolio Theory, which consists of maximizing the return of a portfolio at a given level of risk.

A little bit of history

It was in the early 1950s that Harry Markowitz proposed the criterion of analysis mean – variance and thus laid the foundation for what would later be called Modern Portfolio Theory.
Markowitz starts from the principle that the returns generated by an asset are random variables, then he proposes mean and variance as the respective measurement criteria of the expected return and risk perceived by a rational investor.

Implications for portfolio construction?

To analyze the risk of a portfolio we need to analyze the covariance between each of the assets and their correlation. As a result, a portfolio with several risky assets will be less risky than each asset taken in isolation, hence the adage “Don’t put your eggs in one basket”.
A classic equity portfolio is not 100% comparable to a global crypto investment strategy but we can nevertheless draw some similarities. Indeed, the first way to build a crypto investment portfolio is simply to buy different wedges including BTC and altcoins, especially among the majors (large caps).

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Mix Bots – Manual Trading

Another way would be to divide your capital among several strategies or bots, so as to hedge against a loss on one with the performance of the others.

The right allocation actually depends on your investor profile and risk appetite. Some of you may prefer to allocate a larger portion of your capital to a more conservative strategy with little or no direct exposure to the BTC.

Others are more risk-loving and will therefore allocate less capital to a conservative strategy and more to an aggressive strategy, even in manual and margin trading.

Managing your position and the 2% Rule

Regardless of your risk appetite, it is important to protect your capital. Applying the Two-Percent rule will ensure that you won’t be “eaten alive by the sharks” – during times of large losses that will likely result in the resetting of your capital. Yes, you should always apply the two-percent rule even when the odds are stacked in your favour! It is the basic tenet of risk management.

In Practice – 4C Trading’s SMART Bots

We are going to study two possibilities of distribution together, without this constituting an investment advice. Always do your own research before investing your capital.

For those who wish to trade crypto with stability and earn profit over time, the 4C SMART Bots are your best tool. They trade on automation round the clock on your behalf so you will be stress free.

How do you allocate your funds to the three SMART Bots you ask? The most conservative amongst you, an allocation of 60% SMART BTC, 20% SMART ETH or SMART LINK and 20% SMART Margin would be a wise decision. For those with a bigger risk appetite, they would adopt a fair allocation of 25% exposure on each SMART Bot.

Again, the above decision depends on your risk appetite. The golden rules of trading and investing applies:

  • Never ever bet your lifestyle.
  • Only trade or invest with money you can “afford to lose”.
  • Always know what the worst possible outcome could be.

Risk-Reward on a chart

For those who wish to turn to manual trading, the risk/return ratio on a position is simply the comparison between your profit potential and the size of your stop-loss.

Let’s take an example with this shared short position on our chains, the entry is around 18600, with a stop at 19093 and a final target at 16337. The risk/return ratio here will be equal to 5.96.

Conclusion

In crypto, whether you’ve decided to enter the market as a trader or investor, it is important to learn and research on a constant basis. With blockchain evolving at the speed of light, mastering the fundamentals of trading will equip you with the knowledge to ride the waves of volatility.

Looking for a reliable source to learn from? The 4C Learning Pro Crypto Trading Bootcamp is your answer! Our team of expert traders with decades of experience and a proven track record will take you through the trading fundamentals step by step to help you succeed.

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