Learning to Mitigate Risks When Trading Cryptocurrencies

The volatility of the crypto market is always an unexpected factor to consider, as its various triggers affect prices. However, being prepared and expecting prices to shift is the best strategy for traders who want to manage resilient portfolios. Usually, playing it safe in crypto means diversifying assets, having a well-researched trading strategy, and navigating FOMO (fear of missing out).

But it’s also important to trade established assets, such as Bitcoin and Ethereum, to benefit from their large market capitalization. These assets have shown resistance to price changes and have become the support for further projects, such as spot ETFs or ETH/BTC trading pairs.

However, investing in these assets does not eliminate all risks; finding the right approach to trading is essential, as every individual has different needs. Let’s analyze risk management.

What Are the Possible Risks of Crypto Trading?

Cryptocurrency trading is risky mainly because prices can change too quickly for users to adapt their strategies and minimize losses. At the same time, a lack of preparation and techniques contributes to vulnerabilities, so learning is essential:

• Volatility can lead to shifting values in crypto due to effects like negative news, falling markets, or cyberattacks;
• Liquidity rules how easy or difficult it is to buy an asset based on the number of sellers on the market;
• Scams and frauds are prominent in trading as they cause users to reveal important information about their accounts;
• Regulations are still scarce, so customer protection guidelines are continuously improving;
• Unofficial brokering applications can expose users to risks such as smart contract vulnerabilities;

What Are the Steps Required to Manage These Risks?

Devising a strategy to mitigate risks and challenges in trading means building discipline and gathering comprehensive data on the crypto market to make informed decisions. This includes some of the steps below:

• Identifying the risks you’re exposed to, from cybersecurity to operational issues, according to your level of expertise and use of technology;
• Analyzing the risk through a qualitative and quantitative test that assesses the potential impact of scenarios and offers insights into an efficient trading method;
• Developing a long-term plan as the last resort that includes steps for avoiding, reducing, and transferring the risks;

What Is the Role of Bias and FOMO in Trading?

Cryptocurrency trading is not free of psychological biases and feelings of fear, and these are two of the biggest challenges people face. Biases, for example, involve making a decision without accounting for technical analysis of the market, as there are different types of cognitive biases:

• The confirmation bias makes traders look only for convenient information without considering contradicting insights;
• The recency bias influences the trading decision by only making sense of historical data instead of also taking in recent information;
• The herd mentality is common among traders as they tend to follow each other’s trading decisions rather than personalize their own strategies;

Besides biases, FOMO is a strong emotion that many people struggle with when trading. That’s because fear clouds one’s judgement by compelling them to buy or sell crypto impulsively to minimize their losses or maximize returns, according to the market momentum. Luckily, automated applications and AI-based tools help set the record straight by offering the chance to analyze market conditions first and avoid making emotional decisions.

What Are the Best Tested Strategies to Minimize Trading Risks?

With the right mindset and market analysis, anyone can navigate the challenges of trading and be realistic about losses. For example, one of the best methods for beginners and professionals is portfolio diversification, which spreads assets across classes, industries, or use cases to even out potential volatility when the market is falling.

That’s why trading only large-cap coins is not efficient. Mid-cap assets are highly efficient for diversification, as these projects are most likely to bring innovation to the market and capitalize on opportunities. However, inexperienced traders should think twice before tapping into low-market-cap coins, especially meme coins, as their volatility is the most extreme.

Another essential strategy is stop-loss orders, which help safeguard your portfolio against downside risk. Using an automated tool, you can set sell orders if the trade reaches a given percentage loss, so it gives you a sound exit strategy if the trade is unsuccessful. Of course, leveraging only secure, regulated platforms is more important than the tools used for trading, as apps that follow security standards are better able to protect you from risks and scams.

How Does Technical and Fundamental Analysis Work?

For an efficient trading strategy, conducting research into technical and fundamental analysis will help understand market dynamics and assess the mechanisms suitable for managing trades. For instance, technical analysis includes historical price data, chart patterns, and trading volumes for a given asset or market, which offer insight into optimal trade entry and exit points. Other technical indicators important in this method are moving averages and the relative strength index (RSI), which are best for real-time trading decisions.

On the other hand, fundamental analysis relies on factors that trigger price changes, such as technological development, adoption rates, or regulatory updates that might send prices up or down. These insights can also be used to determine future price trends, since a coin’s continuous technological advancements might pave the way for significant contributions to the crypto market. A helpful side quest in this analysis is monitoring macroeconomic factors and geopolitical events that might hinder the market’s success, so you can be prepared to withstand any possible outcomes, such as the banning of a coin or a sophisticated scam.

Conclusion

Trading crypto assets has become common among many individuals, but it still carries significant risks and vulnerabilities due to underlying dangers. As digital assets are volatile due to numerous factors and regulatory guidelines are scarce, traders find themselves prepared for losses and adjusting their strategies to minimize risk. Some of these include diversifying their portfolios, setting stop loss orders, and managing their biases and strong emotions. Finally, conducting research to analyze the market from a fundamental and technical perspective is the most important step in becoming an expert in trading.