Trading guide for cryptocurrency: 4 Risk Mitigation Tactics

This seventh article in our series about crypto trading is all about managing risks. These tactics help with risk mitigation, but, you should expect less return due to lower exposure to volatility.

1. Before you trade cryptocurrency:

• Know that crypto trading is risky
• No single strategy works every time
• Adopt learning mindset
• Plan ahead for likely scenarios
• Set clear financial goals
• Only invest money you can afford to lose
• Use a strong risk management approach

2. The 1% rule

The 1% rule states that traders should never risk more than 1% of their funds on any single trade. It is a classic risk management strategy that limits the amount of capital at risk in a single trade and protects traders from substantial losses. This is done by setting a stop-loss order to limit losses to a maximum of 1% of the trade value.

How the 1% rule works in detail: Trading SUSHI

• Buy 1,000 SUSHI tokens, each priced at $0.59
• Set a stop-loss order at 1% below the entry price, which is $0.5841
• If the price falls under $0.5841, the stop-loss order is triggered
• Result: The maximum loss is $5.90, or 1% of the initial investment

In conclusion, the 1% rule helps protect your capital. However, in a bearish trend or a volatile market, you risk losing 1% repeatedly, which still adds up over time.

3. Trailing stop-loss order technique

The Trailing Stop-Loss Order technique is the successor of the 1% rule. If the 1% rule protects your capital from big losses, this technique also protects your potential gains.

This technique dynamically increases the stop-loss threshold as the asset’s price increases, thus locking in profits after a rally. Traders were used to updating their stop-loss orders manually, but modern technology allows us to do this automatically.

How Trailing stop-loss order works in detail: Trading SUSHI

• Buy 1,000 SUSHI tokens, each priced at $0.59.
• Set a stop-loss order at $0.5841, which is 1% below your entry price.
• Price Movement Scenarios:
  • If the price rises to $0.7, the threshold rises to $0.693
  • If the price then falls, your stop-loss order is triggered.
    • Result: You gain $103
  • If the price falls, your stop-loss order is triggered
    • Result: You lose $5.9

In conclusion, the Trailing Stop-Loss Order technique helps secure gains during an upward trend while also protecting your capital during a downturn. However, in a volatile market, it may close a position just before a significant price surge.

4. Dollar-cost Averaging tactic

Dollar-cost averaging (DCA) is a strategy where you invest a fixed amount at regular intervals, regardless of the asset’s price. This approach can smooth out the effects of market volatility over time, compared to lump sum investment.

How DCA tactic works in detail: Trading BTC

• Buy $1,000 in BTC at once
• Or buy $1,00 worth of BTC every day for 10 days

Let’s see when BTC price move 5% a day up or 5% down over the period, the difference in the performance of Lump Sum investing vs DCA investing:

Market Condition	Lump sum	DCA
BTC falls 5% daily	(-50% loss)    $500	(-27.5% loss)    $725
BTC rises 5% daily	(+50% gain) $1500	(+27.5% gain) $1275

We can see that DCA investing reduces loss and dampens the gain.

In conclusion, DCA is a suitable strategy for risk-averse investors who prioritize minimizing losses while still participating in market growth. It also offers the flexibility to adjust your investment strategy with the uncommitted fund.

4. ‘Money in money out’ tactic

The “Money In, Money Out” tactic is a simple strategy. Before you invest, set a modest, achievable goal (such as a 2% increase). Once your investment reaches this target, withdraw your initial investment, leaving only the profit to continue growing.

How it works in detail:

• Buy $1,000 in BTC
• Set goal at $1020 BTC
• When the goal is reached, immediately sell $1000 worth of BTC
• Result:
  • You have your initial $1,000 back
  • You still hold $20 worth of BTC as profit

In conclusion, the “Money In, Money Out” tactic protects your initial investment but relies on favorable price trend. Furthermore, the potential profit is limited, as you only earn a fraction of the initial investment’s gains.

5. ‘Profit run, Loss cut’ tactic

The “Profit Run, Loss Cut” tactic is a simple yet effective method for managing a large crypto portfolio investment. By closing losing trades quickly and allowing profitable ones to run, this approach simplifies decision-making, prevents large losses, and takes chances at profitable trades.

How it works in detail:

• Buy $10 in BTC, ETH, TKX, LTC, ATOM, XRP, BNB, SUSHI, CAKE, SOL
• Set threshold at 3%
• When any of the investments dropped by 3%, close the position
• Result:
  • You don’t lose too much when each position is close
  • You can focus more on the remaining coins and analyze if their price movement is favorable

In conclusion, this is a practical method to manage multiple positions at the same time. On the other hand, you risk exiting positions too early, which could recover later. Keeping profitable trades running too long also may lead to less gain.