Managing Risks in Crypto Spot Trading
We have seen how 90% of traders lose money. It's not because they have a bad strategy; they simply lack the most crucial trading skill, risk management. As a crypto trader, risk management is supposed to be your first skill to learn before learning any other strategy. Without the most important skill in trading, risk management, you may always make significant losses in your day-to-day trading and might even risk blowing up your account. In this article, we will give you a guide on how to manage risk when trading spots.
Characteristics of the crypto spot market
But first, let's talk about the Spot market's characteristics.
On a spot market, an asset can be traded at the market's going rate. The transaction is paid "on the spot" after the buyer and seller's orders are fulfilled in the cryptocurrency spot market. There must be buyers, sellers, and an order book on a spot market.
There are a few distinct qualities that define a spot market:
- The delivery of the financial item occurs immediately and is not delayed.
- The financial instrument's pricing determines the transaction price at which settlement occurs at the current spot rate on the stock market.
- Additionally, the money is transferred instantly.
Related articles:
Trading 101: What is Spot Trading?
Understanding the Crypto Spot Market (Part 1)
Understanding the Crypto Spot Market (Part 2)
Potential risks when trading the crypto spot market
Let us look at a few potential risks while trading in the spot market.
- They fluctuate rapidly in price because of their unstable nature and sudden changes in market sentiment. Frequently, the value of cryptocurrencies quickly drops by hundreds or even thousands of dollars.
- Due to their decentralized nature, cryptocurrencies are currently unregulated by both governments and central banks.
- They are monitored instead of peer-to-peer internet protocol because they were designed to be free from governmental supervision.
- Cryptocurrencies are digital money, they are vulnerable to hackers, human error, and technological mistakes.
- They might be impacted by forks or discontinuations: Hard forks and discontinuations are two additional hazards associated with cryptocurrency trading. During a hard fork, we may stop trading if the underlying market does not provide correct pricing. Hard forks can significantly increase price turbulence.
Risk management strategies in crypto Spot trading
You may already know this: One of the most critical rules in trading is never to trade with money you can't afford to lose. Trading with borrowed money is never advisable as this will make you panic and make a lot of losses in the bid to recover the money and pay the person you borrowed money from. Another rule is never to use more than 1-3% of your account per trade. Well, how can we follow the rules? We suggest using the below strategies.
Always take a few quality trades over too many trades.
The traders that overtrade often lose the most time and money. The key to profitable trading is to prioritize quality over quantity. Not every market circumstance will be favorable for your plan. While automatic scalping performs better when the markets are calm, swing trading performs best when there are big trends.
Use low leverage
Since it increases the order size and offers traders the flexibility to go long or short, the margin is widely used by traders. However, if you use too much leverage, your trades won't have time to mature, and you risk losing all of your initial investment if you close a position.
Even though some exchanges offer leverage up to x100, even a 1% move against you can cause your account to be lost. It makes more sense to utilize the leverage of x3. This will allow you to increase your profits while giving you a sizable safety net to exit a lost trade.
Stop Loss + Take Profit
A stop-loss execution order terminates the position when the price drops to a specific barrier. A take-profit order, on the other hand, is an actionable order that closes open positions when prices hit a particular level. Both risk management strategies work well. Stop Losses stop you from trading in deals that aren't profitable, while Take Profits allows you to leave the transaction before the market goes against you.
Traders who use a stop loss are likely to be more profitable than traders who don't. Putting stop loss in your trades helps you to effectively manage your risk as you know ahead of time how much you risk To lose if the trade goes wrong.
On the charts, note important support and resistance levels, and plan out your transactions beforehand. Set your targets for taking profits after calculating the risk-to-benefit ratio. During strong trends, traders can either increase their position or lock in profits by scaling out along the way.
Position Sizing
Position Sizing determines how many coins or tokens a spot or crypto trader is willing to buy at any given time. Since the crypto market is very volatile and there is a probability of realizing a lot of profits, most traders are tempted to invest over 50-100% of their account to make extravagant profits, which puts them at severe financial risk, especially if the trade goes wrong.
A = ((Stack size * Risk per Trade) / (Entry Price – Stop Loss)) * Entry Price
Let’s say we wish to purchase BTC with USDT with a target of US$30,000. Our parameters would be:
Stack Size: US$10,000
Risk per Trade: 1%
Entry Price: US$23,500
Stop Loss: US$19,500
So, our entry amount would be:
A= ((10,000 * 0.01) / (23,500 – 19,500)) * 23,500 = US$587.5
The ideal amount to invest in this deal is US$587.5. However, due to our Stop Loss, we only risk 1% as it will stop the trade once it reaches the determined level.
Risk/ Reward Ratio
The risk/reward ratio compares the potential returns to the risk involved. In trading, a position's profitability can increase with risk. Knowing the risk/reward ratio can help you decide whether to enter a transaction and when it is not profitable. The risk/reward ratio is calculated as follows:
RRR = (Target Price – Entry Price) / (Entry Price – Stop Loss)
From our previous illustration:
Entry price: US$23,500
Stop Loss: US$19,500
Target price: US$30,000
Our ratio would be:
R = (30,000 – 23,500) / (23,500 – 19,500) = 1.62 or 1:1.62
A ratio of 1:1.62 is good. We advise traders not to trade with a ratio lower than 1:1.
Bitget offers Spot trading and Spot Grid trading with Zero trading fees
When trading a spot it is very important to use a very good exchange, especially one that offers zero trading fee, as this will ensure you not only make profits but helps you avoid potential losses that can be caused by excessive trading fees. This is why Bitget introduced the Spot and Grid trading zero fees to enable you to seamlessly trade the spot market without worrying about costs.
Bitget aims to help experienced investors with high trading volumes while giving new entrants a means to enter and profit from the market by doing away with trading costs and inventing special incentives to keep, trade, or earn.
Comparison of Bitget exchange against other exchanges
Final thoughts
We have put you through how you can effectively manage risks in crypto spot trading and how to avoid excess losses while trading. Crypto trading is not supposed to be difficult if you can effectively manage your risks which include knowing when to enter and exit and also avoiding over-trading.
Let’s trade all spot pairings on Bitget for absolutely ZERO fees!
Disclaimer: This article is for educational purposes only and is not intended as investment advice. Qualified professionals should be consulted prior to making financial decisions.
