Manage your crypto trading risks with a plan
Trading brings out strong emotional reactions in most people when they start out.
There is excitement when you open your account.
There is anticipation.
Then comes the butterflies as you put on that first trade.
Then elation as your buy goes higher. Fear and doubt when it goes lower.
On the Internet, you will be told to ignore these emotions. They say they will hurt your results.
You need to be “rational,” to manage your crypto trading risk, they tell you.
How are you supposed to do that?
You need a plan.
I can use my emotions to trade crypto?
What if emotions are a key piece of information to be experienced and observed?
What if emotional responses are the reason why you should have a plan to help you manage the risks of trading?
As a crypto day trader or swing trader, your ability to trade requires you to use your emotions. You learn to use emotions by developing a trading plan and recording results.
Those results will help you develop your trading rules.
A trader without a trading plan is a slave to his or her emotions. And the problem with this approach is that you will earn endless losses without learning how to succeed.
So we’re going to explore the process of developing a trading plan to get you started. This includes:
- * All crypto trading decisions are emotional
- * Trading crypto has risks
- * Crypto trading risk management starts before the trade
- * Your Bitcoin buy starts with a personal question
- * How much Bitcoin should you buy?
- * What price will you buy your Bitcoin at?
- * If Bitcoin drops, how much pain will you accept?
- * What if your trade is a winner?
- * Your crypto trading plan
- * Risk management is the key to successful crypto trading
Now, the first step is to recognize the number one reality of trading.
Here it is…
All crypto trading decisions are emotional
As Jim Camp points out in his book: Start with No, all decisions are emotional. Every single one. So it will follow that your trading decisions will have an emotional component.
And that means that your main adversary as a crypto trader isn’t other traders, or the markets, or the “manipulators.” No, your biggest adversary is the source of that emotion.
That adversary is you.
The question is what to do about it?
When you are sold something, and it’s done well, the process starts with an emotional trigger. Once that trigger is agitated, the next step is to activate the rational mind to justify the purchase. This is done with facts, proof, and evidence.
If this sounds a lot like the articles, news, and the crypto Twitter you’re reading, it is. And as a crypto trader, your job isn’t to be sold. Your job is to develop an idea, test it, record the results and iterate towards profitability.
This process is your trading plan. And you will note that nowhere in the trading plan process is the word emotion mentioned. That’s because, unlike the sales process, you’re going to start with the rational.Then, as you execute and record the plan, you’re going to note the emotional responses. You’re going to flip the process.
Together these are going to make you more resilient and profitable. This process will help you develop your own trading rules. But it all starts with a trading plan.
So let’s start by discussing risk management.
Trading crypto involves risks
In the cryptocurrency market, you have a series of risks.
There is market risk driven by rumours and the way the system works.
You have event risk based on news from around the world.
Then there is execution risk, meaning paying too much or receiving too little as you enter and exit your trades. It’s called slippage. Execution risk includes any other issues with your execution, like your trading platform going down during high volume periods.
You also have regulatory risk. This could be action against the crypto or token you are trading or an unexpected change in the regulatory environment.
There are other risks including cyber risks. There are scammers out there trying to steal your crypto.
You also have to make sure you choose your exchange carefully as well.
You have no control over some of these. But you do have control over your biggest adversary in the market. It’s the one that will cost you the most. Your biggest adversary is the way you perceive your emotional reactions to events.
So the first step in risk management is setting up a plan to help you operate with these risks.
The first step starts before the trade.
Crypto trading risk management starts before the trade
Think about the time you first set up your account on a crypto exchange. Remember when you clicked the orange button to start trading on Bitvo?
You filled in all the info, transferred the funds into the account, and you were ready to buy your first Bitcoin, or maybe some Satoshis.
Do you remember how you felt?
Maybe you’re just getting into crypto for the first time right now. You’re wondering how to buy Bitcoin in Canada, or maybe some Ether. And you’re about to set up your account.
You’re thinking about that first trade.
What are you feeling right now as you do this?
You might be a bit anxious if this is the first time you are putting on a trade.
You might feel a rush of excitement.
Let me ask you something.
What are you going to feel like if it goes lower? What about higher?
How are you going to make decisions going forward once you have your Bitcoin?
Trading starts before the trade is put on. It starts with some thinking and planning. Risk management transforms into a tool for accelerating your learning and trading development.
So how do you do this without a lot of experience?
Start with a few simple questions.
Your Bitcoin buy starts with a personal question
The single most important question to ask yourself before starting as a crypto trader is this: what is the underlying reason for trading in the first place?
This seems like an easy one. You want to make money, right? Or become wealthy or something like that. Now go a layer deeper.
Is it because you want to be seen as smart?
Or have something to talk about in polite company?
Or maybe you like gaming, and you see it as a game.
Perhaps you think it will help you understand crypto by participating. It could also be a vote against the system, a protest. Maybe you are simply looking for some excitement.
Don’t skip this step.
It seems superficial at first, but complete honesty with yourself is key. It helps you understand your decisions, the emotional triggers, and how to plan your path accordingly.
The market is ruthless in uncovering your deepest fears and insecurities about money. So by acknowledging them upfront, you are on the path to self-mastery. This means you’re not guided exclusively by emotional decision-making. You’re not being sold.
Ok, so you know why you are getting involved. What’s next?
What are you going to trade? Are you going to buy a Bitcoin or maybe a bunch of Satoshis to get your feet wet? Some Ether?
Are you going to trade it because you heard about it from a friend or on social media? Or maybe you read some articles and want to get involved.
Write this reason down. It will come in handy later.
How much Bitcoin should you buy?
How much of your capital are you going to use to enter the Bitcoin position?
There are several ways to decide how much to use, but first and foremost, it’s time to revisit the first question: what is the real reason you are getting involved?
There are lots of ways to achieve your underlying reason. It probably doesn’t involve betting your entire savings based on a rumour from an anonymous sycophant.
And next, it’s important to recognize that crypto is one asset class in a universe of asset classes. So putting all your resources in one asset class is not a good risk management strategy. It’s more like gambling than trading.
True, this decision is a bit tougher if you have a small amount of capital.
But the last thing you want to do is get Yammed with everything you have. That’s bad risk management.
Now keep in mind that crypto, for all its promise, is a largely unregulated, speculative asset. That doesn’t mean it won’t succeed or that it will, but what it should tell you is that using all of your capital on this one asset is probably not an ideal strategy.
So take your resources and start with a small portion. As your capital grows, you should only use a small percentage for each trade idea. So if you have $10,000, you might decide to use 10% or 15% max.
Whatever the amount will be for the trade, write it down. It should also be an amount that you’re comfortable losing.
What price will you buy your Bitcoin at?
Alright, so let’s say you’ve decided on Bitcoin. Your account is all set up, and you’re looking at your trading screen. The lights are flashing. The prices are moving around like an ocean.
Now, what price are you thinking about entering the trade, and how will you determine what that entry point will be?
Will you be entering your position all at once, or will you scale lower or higher?
Will you enter a bid with a limit price, or will you buy the offer? Either way, consider using a “limit” order, especially in markets like these. That means an order with a specified price as opposed to a “market” order.
What time period will you enter the order? Will you try to take advantage of illiquid conditions during specific time periods with “stink” bids and offers (that are off the bid-ask spread), or will you enter during periods with higher liquidity and market activity?
How do you figure this out?
Technical analysis is a pretty good tool to help you make your decision. Then there are market stats and volume metrics from different time zones around the world.
Once you figure this out, write down the strategy for your entry point, the time, and the reason.
If Bitcoin drops, how much pain will you accept?
Next, you should be deciding where your tap out point is.
This is a critical part of risk management. Deciding in advance where you will sell or lighten up to preserve your capital means staying solvent. If you lose all your money, you can’t come back tomorrow. And the psychological pain of losses and no idea what to do can freeze you into indecision, making things infinitely worse.
If you know in advance what your loss will be, it changes your perception of it.
So start by planning out your financial pain threshold, which is your tap out point. You might want to take into account the known daily or weekly volatility range of the asset you are trading. The range can give you guidance on where your stop should be. That way, you don’t get stopped out with normal market gyrations.
Once you’ve decided what your acceptable drawdown will be, maybe a certain percent from your entry point, then decide what you will do there. Will you sell it all or lighten up a bit and reevaluate?
Write these numbers down and the reason for them.
Now, if you’re in a trade and faced with a situation where you are frozen and struggling to decide whether to hold or fold, here’s what you do. Sell a small portion of your position to help free up your mind. That one tiny sell, planned as a safeguard, can unlock indecision and get you back on track.
But in the meantime, you can also refer to the plan you wrote out in advance. Read it and execute in a cold, rational way.
What if your trade is a winner
Next, what are you going to do as your trading plan unfolds as expected?
Let’s say you buy 1 BTC/CAD at $15,000. Maybe you think it’s going to $22,000 CDN based on your analysis.
Why this price target? Is there a resistance point on the chart? Heard a rumour? Maybe you are making a guess. Whatever this number is, and whatever the reason, write it down.
Next, if your Bitcoin trade unfolds as expected, how will you exit your trade, or will you?
For example, at your target price, you can decide in advance to sell half of your position to lock in some gains and let the other half ride. Or you might decide to start scaling out 25% at a time at predetermined price points if it continues to progress.
Write this decision down and revisit it if your plan unfolds as anticipated.
Next, timeframe. How long do you think this will take?
The timeframe is key because if you think this will take a couple of months, then you don’t need to watch the ticker all day. If it’s happening any day, that requires different focus and attention.
Depending on your trading style, you may have different priorities. If you’re a day trader, maybe something happening in a couple of months isn’t your forte. Or if you’re a swing trader, maybe a bunch of day trades are counterproductive to your strategy.
Your crypto trading plan
After writing all of these things down, what you have in your hands is a trading plan. You have the thinking, the strategy, and the reasons behind it. This process is the foundation for your risk management, and it is also going to help you in two very significant ways.
First, you are going to accelerate your learning curve. By keeping a record of why you entered a trade, executed it, and closed it out, you will see what you are doing well and what you aren’t doing well. With each new trade, you will adapt and hone these notes, and the result will be a set of trading rules and principles of your own.
By managing your entry and exits, you will be adding discipline to your trading process, which will preserve your capital and eventually help it grow.
Now the second result of this gets back to our old so-called nemesis: emotion.
Your emotions won’t disappear because of writing down your trading plan, but what will happen is that they will have a smaller influence. When the thinking is done in advance in a low-pressure environment, your plan will be unemotional. The execution of your plan will have all the emotions present, but the plan will guide you regardless of how you “feel” while you do it.
The market is ruthless when it comes to our money emotions and deficiencies. The trading plan is designed to help you work around those.
Over time you will be able to see the emotional reaction for the information that it is.
It will move from the self-talk of: I’m afraid, I’m excited, I feel ill – to: why do I feel this way? What is going on? What does this mean? What should I be doing based on this information?
Then you will take that information and use it to override your hard-wired emotional expression.
Risk management is the key to successful crypto trading
All markets have risks, some more than others. Unregulated, speculative products that trade seamlessly across many regulatory, national, and legal boundaries are in a league all their own.
It is participants like you that will help with the development of cryptocurrencies through trading and exchange. As an exchange, Bitvo is designed to bridge the gap between the legacy financial system and the one of the future, helping you develop your trading acumen. But Bitvo and the cryptocurrency movement benefit only if you are successful long-term.
And that means ignoring the predictions of the anonymous soothsayers and oracles of the Internet. It means taking charge of your trading process and risk management.
The more agency you take over your trading behaviour and results, the faster you will accelerate your learning process.
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