There is no gainsaying that cryptocurrencies or cryptoassets have fast become an investment option for millions of people over the years, drawing many to their high potential returns. However, with high potential returns comes high risks and potential for losses. In particular, millions of dollars have been recorded as losses for crypto traders since 2009 to date.
Ever heard of the word “rekt”? Think of it as a shipwreck while sailing at sea. Have you ever been rekt since you began crypto trading? If you haven’t experienced it, lucky you. But if your answer is yes, then you may have to fasten your seatbelt as we guide you on how to avoid or minimize losses as you sail amidst the stormy crypto market.
For starters, the term rekt—which is peculiar to the crypto community—is a variant of the English word wrecked. It is often used to describe a scenario where crypto traders lose large sums or suffer liquidations following a market dump.
Without much ado, let’s look at some strategies a crypto trader can adopt to minimize the risk of losing money and instead increase long-term success and profitability.
1. Know that the crypto market is highly volatile.
The crypto market is among the most volatile markets you would ever come across. In other words, high price volatility is a characteristic feature of the crypto market due to its speculative nature. Hence, it is important to learn to master crypto-price movements, else you will always be a victim of liquidations or one who records losses often.
What do we mean by market volatility? It simply refers to the degree of fluctuation or instability in the price of a financial asset or market over a certain time frame. It is a statistical measure of the dispersion of returns for a given market index.
Crypto market volatility can be caused by a variety of factors, such as changes in economic conditions, geopolitical events, company-specific news, or shifts in investor sentiment. Notably, higher market volatility generally implies higher risk, as there is a greater likelihood of sudden and large price movements that can lead to significant gains or losses.
When there is high volatility in the market, the prices of cryptocurrencies can fluctuate dramatically in a short period. For example, when there is an increase in the demand for a particular cryptocurrency, its price may experience a quick surge. Likewise, a sudden decrease in demand for a particular cryptoasset which could be triggered by a release of negative news often tends to draw the price of such cryptocurrency down in a matter of minutes.
Thus, crypto traders need to keep an eye on or understand every factor that can make the crypto market tick. Adequate fundamental and technical analysis can be used to identify trends and patterns in the crypto market to avoid being caught off guard.
Read also: What is Fundamental Analysis and how is it used in the crypto market?
2. Have a trading strategy/ plan.
Every successful crypto trader always has a trading strategy. It helps to maximize profits while minimizing risks. A crypto trading strategy is simply a set of rules and guidelines that a trader follows to make buy-and-sell or investment decisions in the cryptocurrency market based on certain factors unique to the trader and the market.
There are different crypto trading strategies. Different types of trading strategies—or a combination of them—can be used by traders in the cryptocurrency market. The most effective strategies will depend on an individual trader’s goals, risk tolerance, and level of experience. Remember that Mr A’s strategy may not work for Mr. B. So, have your own strategy; one that suits your personality.
Some common crypto trading strategies include breakout trading, trend following, arbitrage, scalping, pullback trading, position trading, and support and resistance trading among others.
It is one thing to develop a crypto trading strategy but it is another thing to stick to it. Learn to stick to your strategy and never let emotions cloud your judgments. Crypto traders who deviate from their strategy are more likely to make mistakes and suffer losses. Sticking to a well-defined trading strategy can help you avoid making emotional decisions and increase your profitability.
You want to gainfully navigate the crypto market, right? Then learn to plan every trade and trade the plan. Don’t be an emotional trader.
3. Carefully manage your risks.
As mentioned, crypto trading is a high-risk business as the market can be highly volatile with rapid price fluctuations that can result in significant gains and losses. This makes risk management a necessity for any trader with profitability in mind.
Portfolio diversification which entails the spreading of trading capital across different cryptoassets is one of the ways to manage risks. This can reduce the impact of market volatility on a trader’s portfolio, as losses in one asset class can be counterbalanced by gains in another.
Another risk management approach is the use of stop-loss orders. Stop-loss orders are designed to limit losses by automatically closing a position if the price of a cryptocurrency falls below a certain level. This helps to prevent total liquidation.
Risk management also involves managing leverage effectively. Leverage is a tool that future traders use to amplify their gains. But, it also heightens the amount a trader can lose if his prediction goes south. Understanding the risks associated with leverage and using it responsibly is key to basking in profits.
Additionally, setting realistic profit targets can reduce exposure to unnecessary risks. Avoid extending your profit targets when it is close to being hit as that could be a sign of greed.
4. Learn to always take profits.
As simple as taking profits sounds, it is difficult for some traders, particularly the inexperienced traders.
Dear crypto trader, profits are meant to be taken. No one has ever gone wrong taking profits. Remember that unrealized profits are not actual profits. That is, it is not called profits until it is taken.
When should you take profits? The moment it hits your predetermined target. You also know it’s time to take profit when the urge to take a snapshot of your unrealized profits and share it with your friends comes. Don’t be a victim of your mind; be a master of your mind and take profits when they come.
5. Go for knowledge, not signals.
Adequate knowledge is undoubtedly the number one way to avoid or minimize losses as an existing or intending crypto trader. Why? When you have proper knowledge of how the crypto market works and moves, its seasons and market cycles, you will always be one step ahead. Normalize reading materials and taking courses relevant to crypto trading.
While copy trading or getting signals from reliable sources isn’t a bad idea, relying absolutely on signals could be you opening the door for more losses. Depending on signals is as good as entrusting your money in the hands of another. Remember signals fail from time to time but knowledge never fails.
6. Carry out proper analysis before trading.
Whether it is fundamental analysis or technical analysis, do well to carry out due diligence before entering any trade. The goal of fundamental analysis is to determine the intrinsic value of an asset and assess whether it is undervalued or overvalued. This type of analysis focuses on the factors that affect the supply and demand of an asset, such as its tokenomics, industry trends, company financials, and other macroeconomic parameters.
Fundamental analysis is also used to evaluate the long-term prospects of a cryptocurrency. Traders can use fundamental analysis to assess the quality and sustainability of a cryptocurrency project, as well as its potential for growth and adoption.
On the other hand, technical analysis involves studying historical price charts and using technical indicators to identify trends and potential trading opportunities.
Read also: What are the top 5 technical analysis indicators to know?
While crypto trading has proven to be a profitable investment option for many, it comes with significant risks and potential for losses. Crypto traders need to be aware of these risks and develop strategies to avoid or at least minimize them. By monitoring market volatility, developing a suitable trading strategy, observing proper risk-management measures, as well as exploiting technical and fundamental analysis, traders can avoid or minimize losses significantly. With these measures and strategies, a crypto trader can profit big time in the crypto market.
Read also: How do I manage investment risks in the crypto market?
Credit: Ndianabasi TomA crypto journalist and content writer who has been talking about cryptocurrency and blockchain technology since 2018, Ndianabasi is a Writer at Crypto Asset Buyer (CAB).