More people are searching for proven approaches for reducing risk in crypto investments.
By following two simple risk control rules, it is possible to improve your returns and to effectively manage risk in your cryptocurrency investments – and at the same time resist the silky lure of price prediction.
- Managing losses in crypto trading
One of the most important risk control rule is to reduce or close your position unless it proves you correct. This means that if an investment is not performing as expected, it is important to reassess the situation and consider whether it is worth continuing to hold the position. If the investment is not meeting your expectations, it may be necessary to cut your losses and exit the trade.
This rule is important because it allows you to minimize potential losses by getting out of a trade that is not working in your favor. By holding on to a losing position, you are essentially doubling down on your initial error and increasing the risk of further losses. By reducing or closing your position, you are able to limit the potential for loss and to preserve your capital for future trades.
Another reason why this rule is so important is that it helps to prevent you from becoming emotionally attached to a losing trade. It can be easy to become emotionally invested in an investment, especially if you have a strong belief that it will eventually turn around. However, this can be a dangerous mindset to have, as it can lead you to hold onto a losing position for longer than you should. By following the rule of reducing or closing your position unless it proves you correct, you are able to maintain a level-headed and objective approach to your investments.
- Increasing profits in crypto trading
The second risk control rule is to press your winners correctly without exception. This means that if an investment is performing well and meeting your expectations, it is important to take advantage of this success and to maximize your profits. This can be done by “pressing your winners,” or increasing your position in the investment.
This rule allows reminds you to take advantage of market opportunities and to push your correct position. By adding onto a winning position, you are able to capture a larger share of the potential profits. This can be particularly important if you are trading in a long trending market, as it allows you to capitalize and to potentially generate significant returns.
This rule is so important because it can prevent you from second guessing yourself and being too conservative in a position that has been proven correct. It can be tempting to take profits early and to lock in your gains, but this can also prevent you from maximizing your returns. By pressing your winners, you are able to stay engaged in the market and to potentially capture even larger profits.
Manage Risk, Don’t Predict Price
Managing risk is considered to be the primary job of a trader. This is because, while predicting price movement can be an important part of the trading process, it is ultimately not within a trader’s control. Crypto markets are especially unpredictable and require proven and tested strategies for following the trend while diversifying at the beginning of altcoin season. There are simply too many factors that can influence price movements, including economic events, new regulation changes, political developments, business failures, high level frauds, and even social and psychological factors… to name a few…
As a result, it is simply not realistic to accurately predict price movements on a consistent basis.
The primary job of a trader is managing the two sides of risk
- mitigating the potential for loss.
- maximizing the potential for gains.
A crypto traders primary job involves identifying and analyzing potential risks, developing strategies to mitigate exposure to those risks, and implementing those strategies effectively. Their secondary job is to increase exposure to risk when the trade is going in our favor.
By following a risk management approach that feels good and is easy to manage, traders are prepared in advance to preserve capital and maximize the potential for large and significant profits.
Why Do We Focus On Price Prediction?
Talking about price prediction is more seductive than talking about reducing risk in crypto investments for traders. It allows us to feel a sense of control in an unpredictable setting and we gain prestige and recognition from others when we are correct. However, it is important to recognize that price prediction is an unreliable activity and ultimately – it is not the primary focus of any pro trader.
Relying on our own price prediction it too heavily can lead to poor decision-making. If a trader becomes overly focused on trying to ‘be right’ on the direction and size of price movements, they may make trades based on their predictions rather than on sound risk management principles. This can leave a trader open to much bigger losses.
Top Crypto YouTubers and social media influencers may focus on price prediction because of a desire to gain approval from others and to earn income from views. This desire for approval can be particularly strong when it comes to activities that are perceived as challenging or prestigious, such as trading.
Price prediction leads new traders away from the job they are supposed to be doing…
For many traders, the pursuit of profits and success in the markets can be closely tied to their ego and their desire for social recognition. They may feel a sense of pride and accomplishment when they are able to predict price action and seek validation and approval from their peers and colleagues.
Trading Mistakes When Winning
Trading Mistakes When Losing
This desire for social recognition is a powerful motivator, but it can also lead to negative consequences in trading. For example, a trader who is overly focused on seeking approval and recognition may make risky trades in an attempt to impress others, even if those trades are not in line with their overall investment goals and risk tolerance.
Surrendering to the unknown can be emotionally challenging because it requires letting go of our ego’s desire to be in control and to have a sense of predictability. It can be difficult to accept that we cannot always know or control what will happen, and this can lead to feelings of anxiety and uncertainty.
However, surrendering to the unknown allows us to release our attachment to certain outcomes and to expect reversals against all of our best analysis.
When we focus on managing risk right now and not on potential results that ‘should’ happen, we naturally find a greater sense of freedom and peace in managing out trade positions.
In the context of trading, surrendering to the unknown is simply part of the job.
The markets are inherently unpredictable and volatile.
However, with a good trading plan we can learn how to let go of our need to control every outcome and to predict every price movement, we can free ourselves from unnecessary stress and anxiety and focus instead we assign that difficult work for our money to do on our behalf while we do other things.
Our only job is effective risk management. Our two risk control rules – reducing or closing your position unless it proves you correct and pressing your winners correctly without exception – are the keys that will keep you focused on reducing risk in crypto investments in order to tip the odds in the unfavorable game of trading… to your favor.