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Risk Management in Cryptocurrency Derivatives Trading

Author: nicolas tang

bitcoin cryptocurrenc trading

Owing to the inherent risks involved in trading cryptocurrencies, cryptocurrency derivatives traders should incorporate risk management strategies in their trading strategy. Mostly, the volatile nature of cryptocurrencies makes it very risky to trade cryptocurrencies. The average daily ranges are normally too large. Therefore, in the case of a small trading mistake, if no risk management strategy is employed, the trader risks losing everything.

Below are a number of risk management strategies that cryptocurrency derivative traders can use:

1. Using stop-loss and take-profit levels

Stop-loss levels are levels that traders could set for automatically closing those trades that end up making losses. On the other hand, take-profit levels are responsible for closing the profit-making trades before the trend changes.

The two help in mitigating risks of abruptly market changes especially when the trader isn’t in front of the computer. For instance, there was some reported hacking, it could prompt a large price movement. If a trader had open trades at the moment and they happen to be in the opposite direction of the market movement, then they would lose all your invested amount without a stop loss level. Also, if the trade was in the direction of the price movement, it would require a take profit to close it before the trend changes.

These two levels should be used carefully. You have to ensure that you do not close your trades too early or too late. Closing trades too early could bring regrets why it was closed and it could have made more profits. On the other hand, closing trades too late could result in losses.

In derivatives trading, stop losses are attached as guaranteed stops. When they are triggered, the trader has to pay a premium at the cost of losing all the invested funds.

2. Having few running trades/contracts

Opening a few contracts/trades at any given time ensures that you have the margin to hold the trades for long. The fewer the trades, the larger the free margin. Therefore, trades can be held in the market long enough to make the anticipated profits.

The number of trades is determined by the account balance. For a low account balance, open trades should be maintained between 1 and 2 trades at any given time.

3. Avoiding revenge trading

Revenge trading is most common among beginners. Traders at times become furious at the market for making a loss. As a result, they place another trade immediately, in the hopes of making profits to dilute the loss. However, since the trade was made outside the trading strategy, it will most likely lead to another loss.

4. Sticking to the trading strategy

Traders should understand that it is normal to make a few losing trades. No trader is 100% perfect. At times one will make losses here and there. If the overall returns are profits; meaning profits are more than losses, one should not worry about the few losses.

A trader should learn to stick to the trading strategy no matter the outcome at the moment. However, if the trading strategy turns out to make more losses than profits, the trader can abandon it.

Nevertheless, one have to ensure that the cryptocurrency derivatives trading strategy is profitable before starting to use it. And the best place to test it is in a demo account.

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