Welcome to our Risk Management Guide, in this guide we want to elaborate on the different considerations a trader has to make in regard to risk management.
In this guide, we want to discuss the following topics and questions:
Shall I trade in a bear market?
Against which projects shall I trade?
Shall I use stop-loss, DCA or shorting?
Shall I use only buy and sell signals or trailing stop-loss?
Risk management is a very, very, important part of being a trader. To be clear, all the questions above are personal considerations. We don't advise trading in a bear market. We're not financial advisors. Not having expertise in trading can lead to significant losses.
Bull market vs Bear market
Though it's difficult. It's possible to make profits in each market sentiment, also in a bear market. Don't expect huge profits. Not every day trades can be made. You have to be on the lookout for the right opportunity's.
Being patient is of the most essential essence if you want to trade in a bear market. Don't be bullish in a bearish sentiment. Wait for the right entry opportunity and be on the look-out for the next exit. Be conservative and not aggressive.
We created strategies that can support you in doing just that!
Read more about Altcoin Scraper, Volatility Hero and Crash Accumulator in our Strategy Guide.
Learn to spot the right entries with our Technical Analysis Guide.
Against which projects shall I trade?
To determine against which projects you're going to trade you can consider many factors. IS the coin I want to trade against having enough liquidity? The more liquidity the less (extremely) volatile the market is which means the more accurate the trades will be.
Conduct your own research that on a coin. What is the project behind it? You probably heard about the term 'shitcoins'. With this, people refer to a coin that actually doesn't have a good team, project and/or vision behind it.
For example, a person is having faith in a certain coin because he did a lot of research in the project behind it. He is bullish on the project and thus believes the coin will go up in value in the future.
Depending on if he believes the coin will go up in value in the long term future or the short term future, this person can deploy different strategies on this coin. He can choose to accumulate (with the help of our strategy Crash accumulator). Or, if he knows that a huge update is coming up that will bring a lot of attention the coin in the short term future, he can deploy a swingtrading strategy for shorter trades (with for the help of our swing strategy (Swing Meister).
Always remember (shit)coins can also have massive dumps in a bull market!
Stop-Loss vs DCA
A stop-loss is designed to limit the loss on a position. For example, setting a stop-loss order for 10% below the price at which you bought the coin will limit your loss to 10%.
DCA (or Dollar Cost Averaging) is a technique that’s used either to average your buying price or as the “Martingale technique”, which you use when a position is in a deep loss. The assumption of DCA is that a crypto price will rise eventually, so if you keep doubling your investment, your average buy price will be lowered, and you will make a profit sooner when the price rises again. You do need deep pockets for this technique, as you will need to keep doubling down on your investment.
Conclusion: The most important consideration in order to choose between using a SL or DCA is about your assumption on how the project you're trading against will perform in the future. With DCA you add more funds to a position, lowering the entry price. A way to look at it is that in the end it will result in one big trade because you have a high exposure ones you DCA a couple of times. This will result in more profits but also in more losses. With stop-loss it's each trade independently. Lowering your exposure but also your profits.
Sell based on strategy vs Trailing Stop-Loss
Sell based on strategy is meaning that the asset will be sold based on the strategy that you have deployed. This can have pro's and con's. A pro is that you can have more profits. The strategy will only start selling when it's having multiple confirmations that the price is going down. This can lead to significant profits. It's also having the pro that it can prevent prematurely selling an asset. For example, when a flash crash occurs (which happens a lot in the cryptocurrency market) the strategy wouldn't give out a sell signal because there aren't enough confirmations. If you had used a stop-loss in this example your stop-loss would have been triggered which would've resulted in loss. Also a pro, when the strategy is getting the confirmations to give out a sell signal it can already sell the asset before a stop-loss is being triggered. Reducing potential losses.
Con's with using sell based on strategy is that it's possible that due to volatility, a strategy can give out a false sell signal. What will result in a sell signal that is premature. Also, if a crash happens very suddenly, it can take longer to sell because the indicators on a larger timescale are lagging.
Trailing Stop-Loss (TSL) automatically adjusts your stop-loss when the price goes up. Whenever the price goes down again, your TSL will fire and sell your position. This is an ideal way to follow an upwards trend and to prevent selling too early. Manual, semi-automatic, and full auto-traders all use this feature.
Conclusion: Only using sell based on strategy can lead to more profits. However. It is less secure. With TLS and stop-loss you can take profits more secure and reduce potential losses. Luckily you can use both settings at the same time!