5 Essential Risk Management Strategies for Crypto Derivatives Traders

5 Essential Risk Management Strategies for Crypto Derivatives Traders

There’s no doubt that investing in crypto derivatives can lead to massive rewards. But, to see the best return on your investments there’s a fundamental skill you have to master - risk management.

Risk plays a central role in crypto derivatives trading and, despite the enormous prospective rewards, there is always the potential for losses. That’s why it’s important that every trader employ, from the very beginning, tried and tested risk management strategies.

After you’ve learnt how to manage risk effectively, you’ll see your profits soar. And here’s how to do it.

The Fundamentals of Risk Management

Before you get started you need to understand the basics. Crypto derivatives, by definition, provide a way for traders to mitigate risk by allowing them to derive rewards from the prospective success of an underlying asset - like Bitcoin, instead of staking everything on a volatile currency prone to price fluctuations.

In fact, crypto derivatives are actually making the whole cryptocurrency industry a less risky place to operate.

Although hedging doesn’t necessarily lead to a direct profit, it’s a very effective protection mechanism, and as every trader must learn it is vital to protect your capital before growing it.

By investing time into a solid risk management strategy, traders can ensure losses are outweighed by gains.

The first thing every crypto derivatives trader must do before developing an effective risk management strategy is to define a clear set of goals. Derivative trading should not be driven by emotion and a well-defined set of objectives is the first step before you commit to a strategy.

There are a number of clearly defined areas of risk that financial traders need to be aware of including credit, liquidity, operational, systemic, and compliance.

But for crypto derivatives traders the key risks to be aware of are:

Market Risk - The risks associated with volatile, or changeable market conditions.

Investment Risk - The direct risks associated with investing in the cryptocurrency ecosystem.

Top 5 Risk Management Strategies

1.      Monitor the market - and your strategy

If you commit to trading in crypto derivatives it is important that you continually monitor the market to ensure you are aware of the position of your investments.

One way to stay ahead of the game is to automate trades by setting up specialised orders. For example, a stop-loss order will only be sold when the price falls to a predetermined point and is usually deployed to prevent a major loss, while a take-profit order closes when a certain level is reached and is a sensible way to earn a steady profit.

2.      Diversify, diversify, diversify

It is incredibly important for crypto derivative traders to have a balanced investment portfolio.

By diversifying, traders can ensure that their investments aren’t concentrated in one place and can avoid a scenario where this investment may take a tumble. By spreading investments across a series of derivatives, you stand far more of a chance of making a profit and less chance of suffering a major loss.

3.      Decide how much you can afford to lose

The phrase “Never invest more than you can afford to lose” is well-established in financial markets and is relevant to crypto derivatives too.

By staking a maximum of 2% of the available capital on a single trade the risk of a major loss is nullified. But the fundamental point to remember here is that you need to accept losses.

A a good trader will not allow emotion to enter the space and by sticking to a multi-point strategy any loss should be outweighed by profits. Every successful trader knows that if they are going to succeed it’s vital that they leave their emotions at the door and operate in a systematic and measured manner.

4.      Make it personal
Don’t copy and paste. Many people have developed successful risk management plans and it’s worth investigating what they entail. But every portfolio is different so be sure to make it personal.

If you follow the strategies covered in this blog, you’ll certainly be off to a flying start.

5.      Don’t be afraid of change

It’s important to constantly monitor your risk management plan. Is it leading to profits? If not, it’s time to investigate a new one.

There is no problem in changing the way you approach risk, just focus on the areas of risk that could affect your investments and tweak your strategy accordingly. The crypto derivatives space is constantly changing, and your risk managements strategies should evolve with it.

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