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6 Simple Steps to Manage Risk and Emotions When Trading Crypto

Michiel Mulders
October 4, 2020
man balancing on a tightrope

Crypto trading has changed millions of lives all across the globe. With the rising adoption of cryptocurrencies and crypto technologies powering some of the most prominent institutes, now is considered the best time to start crypto trading.

The most significant consideration for any crypto trader is that like any other form of trading, success in crypto trading is heavily dependent on the way you control your emotions. If you can master the art of managing both risk and your emotions, you can potentially increase your trading profits or the ratio of good vs bad trades.

With all my past experience, I am going to list some of the most simple and best ways to control risk and emotions in crypto trading. If used correctly, you can try these strategies in real life on YouHodler’s Multi HODL tool. Managing risk effectively on Multi HODL tends to come with positive results. 

Without any further adieu, let's dig deep into the best ways.

1. Controlling the fear of missing out (FOMO) - Emotional Trading

One of the most prominent emotions to master in trading is the fear of missing out or popularly known as FOMO. The most common problem with new traders is that they tend to invest in a coin that has completed its bull run and they feel the need to join the rush. 

There will be many instances in which you will be predicting the growth of about five coins, and if one of those coins does a bull run, you will have a guilty feeling of not investing at the right time. Furthermore, you will feel as if you still have the opportunity and that you are leaving free money on the table.

Most often, this results in a wrong decision as the trader experiences a market reversal instead of an extended bull run.

The best way to deal with this scenario is to invest small and experiment in the initial stages. Even if you feel the urge to join trends and even if these turn out to be wrong decisions in the short term, make sure to follow what you decide which will be beneficial in the long run!

Each of the trades that you will be making should be based on some strategy and follow basic trading principles. If you are not using any trading indicators, it is time to learn the basics and then apply them to your crypto trading.

2. Start with a plan and follow it

Now, most of the new traders will start by testing their luck and trading in the same manner they would in a casino.

Trading is not gambling, and the reason that 95% of the traders fail and lose money in trading is that they trade without a plan.

There is no secret hack in trading, and you can only succeed if you come with a trading plan. You must have the answers to the following questions - 

  • What is your budget for a particular trade?
  • Where to set your stop-loss and take-profit?
  • What chart pattern are you following for indications?
  • What’s your trading strategy? Scalping, day trading
  • Did you test your trading strategy using virtual markets first?
  • What’s your selling strategy for a trade?
  • What news sources will you use to educate yourself about important events?

You should have an answer to all these and many other questions so that you are making decisions based on your plan and not with emotions. The goal of having those answers is to avoid a situation in which you don’t know what to do. Should you sell your position or wait a bit longer? If you don’t have a ready-made answer, it’s likely that your emotions take the upper hand. 

3. Sizing your positions

The most significant risk management strategy in crypto is to size your positions and invest accordingly. 

Make sure to control your urge of going "all-in" which is the quickest way to failure in crypto. It’s better to open three smaller trades than one big trade. (On Multi HODL, you can open multiple trades in various directions all at the same time).

It’s much harder to recover from a big loss than one or two small losses. In other words, spreading your trading capital among different trades allows you to reduce risks. 

In short, sizing your positions will make sure you can open more trades and increase your chances of making a profit. Avoid betting all your money on a single trade, even though you spot a massive opportunity.

Want to access more trading capital? Check out YouHodler’s instant crypto loans.

4. Finding the right time to trade in fiats or stablecoins

One of the things which generally remains unnoticed is the time to switch between currencies at the right time.

This type of risk management is to be considered especially when Bitcoin is at its peak, and the bull market has reached the saturation point. 

Make sure to keep a note of this scenario as you are most likely to forget it during the "good" times. The best approach during this time is to convert your inactive cryptocurrencies into fiat currencies or stablecoins. 

Do you have inactive crypto or stablecoins? Take a look at YouHodler’s crypto savings offering tailored to earn a passive return on inactive crypto assets.

5. Lock in significant gains in the market

If you have reached a point of significant profits in the market, it is time to cash in the trades. Potential profits can invoke a lot of emotions, and with time, we may feel like remaining in the market is the best choice always.

However, this is a common mistake among traders. It’s almost impossible to target the market perfectly to lock in your profits. Therefore, think about a percentage-based selling strategy where you gradually sell parts of your trading size as the market moves up. For example, take a look at the following distribution:

  1. Sell 50% of BTC trade at $10,500
  2. Sell 25% of BTC trade at $11,200
  3. Sell 15% of BTC trade at $11,500
  4. Sell remaining trade size at $12,500 or at $11,500 if the market drops

6. Backtest your strategy before applying to real markets

One thing that is common in the life of every trader is that traders are bombarded with new ideas almost every other day. 

Never make the mistake of trying your strategy in the real market while being ridden with emotions and end up increasing the stakes to lose it all in one go.

We live in a world of modern technology, and you can test all your strategies virtually on past data. This is called backtesting where you try out your strategy on historical data to see if it would return a profit, or not. 

YouHodler also has “demo currency” which you can activate and trade with on Multi HODL without any real financial consequences. It allows you to play with all the features on YouHodler and learn what strategies work best for you. Click here to activate it now. 

Conclusion

Your crypto trading journey is going to be a ride full of emotions and learnings. You will surely win many trades and lose many trades as well.

The most successful traders are the ones who can control their emotions during this journey and trade like a robot. Use your emotions only while making the strategies, but execution should be like a robot.

Follow all the steps in this post, and you will be able to better control your emotions while trading.

So go to YouHodler today and try out these strategies on Multi HODL.

Make sure to tell us about the results you get after following this post and also some additions that you think I missed!

About the Author
Contributor

Michiel Mulders is a blockchain developer with a passion for the crypto space. His interests include blockchain, entrepreneurship, marketing, and carefully crafted beers. Cheers!

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