Summary

Risk management is a key component of responsible investing and trading. You can reduce the overall risk of your portfolio through various risk management methods, such as diversifying, hedging against financial events, or executing simple stop-loss and take-profit orders.

Introduction

Achieving risk minimization is an important issue for many investors and traders priority. Even if your risk tolerance is high, you will still weigh the risk and reward of your investments in some way. However, risk management is more than just choosing less risky trades or investments, it involves a comprehensive set of risk management strategy tools, many of which are suitable for beginners as well.

What is risk management?

Risk management requires anticipating and identifying the financial risks associated with your investments in order to minimize them. Investors then employ risk management strategies to help manage their portfolio's risk exposure. A critical first step is to assess your current risk exposures and then develop a strategy and plan around those risks.

Risk management strategies refer to the plans and strategic actions implemented by traders and investors after identifying investment risks. These strategies reduce risk and may involve a number of financial activities, such as taking out loss insurance and diversifying your portfolio across different asset classes.

In addition to practicing proactive risk management practices, it is critical to understand the basics of risk management planning. Before you begin implementing a specific risk management strategy, you should consider the following four key risk management planning approaches that will inform your preferred strategy.

Four key risk management planning methods

1. Assume: The decision to assume the risk of investing in an asset, but since the potential loss is small, it is not costly to avoid it.

2. Transfer: Transferring investment risks to a third party for a fee.

3. Avoidance: Not investing in potentially risky assets.

4. Reduce: Reduce potential losses from high-risk investments by diversifying your portfolio. The approach may apply within the same asset class, or even across industries and asset classes.

Why are risk management strategies important in the cryptocurrency investment field?

As we all know, cryptocurrency assets are one of the high-risk investment categories within the reach of ordinary investors. Cryptocurrency prices have proven to be highly volatile, projects can collapse overnight, and the technology behind blockchain can be difficult for newcomers to understand.

With the rapid development of cryptocurrencies, investors must adopt sound risk management practices and strategies to reduce their potential risks exposure. This is also a critical step in becoming a responsible and successful trader.

Here are five risk management strategies that can benefit your cryptocurrency portfolio.

Strategy #1: Consider the 1% Rule

The 1% Rule is A simple risk management strategy that requires risking no more than 1% of total capital on an investment or trade. If you have $10,000 to invest and want to adhere to the 1% rule, here are a few ways to do it.

One is to buy $10,000 worth of Bitcoin (BTC) and set a stop loss or limit price of $9,900 to sell one. In this case, you can reduce your losses to 1% of the total invested capital ($100).

Also, you can buy $100 of Ethereum (ETH) without setting a stop loss order. , even if the price of ETH drops to 0, you will only lose at most 1% of your total capital. The 1% rule affects not the size of your investment, but the risk you are willing to take on an investment.

Due to the high volatility of the cryptocurrency market, the 1% rule is especially important for cryptocurrency users. It is easy to become greedy, and some investors may invest too much money in an investment and even suffer huge losses in the hope of better luck.

Strategy #2: Set Stop Loss and Take Profit Points

Stop A loss order sets a predetermined price for an asset. When the asset price reaches the predetermined price, the liquidation operation will be triggered. A stop loss price below the current price will help prevent further losses if triggered. A take-profit order works in the opposite way. It sets a predetermined price for an asset. When the asset price reaches the predetermined price, a liquidation operation is triggered to lock in a certain profit.

Stop-loss orders and take-profit orders help you manage risk in the following two ways. First, they can be preset and executed automatically. You don't need to keep an eye on the market around the clock. If the asset price is highly volatile, your preset order will be triggered. Additionally, you can set realistic limits on the losses and profits you can tolerate.

It is best to set these limits in advance rather than in the heat of the moment. While it may seem a little strange to think of take-profit orders as part of risk management, you should keep in mind that the longer you wait to take profit, the higher the risk that the market will fall again while waiting for further gains.

Strategy #3: Diversify and Hedge

A diversified portfolio is lower One of the most popular and fundamental tools for your overall investment risk. A diversified portfolio does not invest heavily in any one asset or asset class, thereby minimizing the risk of significant losses in a particular asset or asset class. For example, you can hold a variety of different coins and tokens, as well as provide liquidity and loans.

Hedging is a more advanced strategy that protects gains or minimizes losses by purchasing another asset. These assets are typically negatively correlated. Diversification can be called a hedging strategy, but perhaps the most well-known hedging strategy is futures.

You can lock in the price of an asset at a certain date in the future through futures contracts. For example, let's say you think the price of Bitcoin is going to plummet, so you decide to hedge this risk and open a futures contract to sell Bitcoin for $20,000 in three months. If the price of Bitcoin does fall to $15,000 in three months, you will make a profit from your futures position.

It’s worth remembering that futures contracts are financially settled without you actually delivering the tokens. In this case, your contract counterparty will pay you $5,000 (the difference between the spot price and the contract price), and you will successfully hedge the risk of a falling Bitcoin price.

As mentioned before, the cryptocurrency space is highly volatile. However, investors can still diversify within the asset class and take advantage of hedging opportunities. Diversification is even more critical in the cryptocurrency market than in the less volatile traditional financial markets.

Strategy #4: Prepare your exit strategy

Having an exit strategy is A simple yet effective way to minimize the risk of significant losses. By sticking to your exit plan, you can realize profits or reduce losses at a predetermined point in time.

Normally, it is easy for investors to want to continue when profits are made, and it is easy to be too trusting when prices fall. Cryptocurrency. Indulging in hype, maximalism, or trading communities can also interfere with your investment decisions.

One way to successfully implement an exit strategy is to use a limit order. Whether you're looking to take a profit or set a maximum loss, you can set your limit order to automatically trigger when the limit price you set is reached.

Strategy #5: Do your own research (DYOR)

Yourself Doing your research is an essential investment risk-mitigation strategy for any investor. In the age of the internet, it’s easier than ever to do your own research. You must conduct your own due diligence before investing in a token, project or other asset. The key to due diligence is to review basic information about the project, such as the project white paper, token economics, partners, roadmap, community, and other foundational elements.

However, misinformation spreads quickly and anyone can submit their own opinion or data online. Therefore, when conducting research, it is important to consider your sources of information and the context in which they are presented. Scams for hire are commonplace, and projects or investors may pass off false, biased, or propaganda news as sincere, factual news.

Summary

This article outlines five risk management strategies to provide you with an effective toolkit to assist in reducing risk in your portfolio. Even a simple approach that covers most areas can help you invest more responsibly. In addition, this article can help you develop risk management plans and more advanced and in-depth risk management strategies.

For more information on this topic, please refer to the following article:

• "How to Responsibly Manage Risk and Trading" | Binance Customer Service

• "Risk-Return Rate What it is and how to use it》 | Binance Academy

• Three reasons why Binance Futures has become the preferred two-way investment platform for traders