November 12, 2024 Welcome back to our blog, where we try to equip traders and investors with the information they need to understand the world of cryptos and how to master the markets with our wide range of advanced crypto bots.
In today’s blog post, we’ll discuss one of the most crucial aspects of crypto trading – portfolio management. As a topic we’ve been casually/briefly mentioning throughout our blog over and over again, this time we’ll delve into all the ins and outs of what it means to have a balanced portfolio, what the benefits are, how crypto bots fit into it, and as usual, we’ll wrap things up with some valuable tips and practical advice about how to build and sustain a well-balanced portfolio.
Before we move forward with our agenda for today, we want to remind all of our readers that the information presented in this blog post is intended solely for educational purposes and should not be considered a call to action or any financial advice. Traders must consider their financial status, trading goals, and risk tolerance before employing any crypto trading strategy. Cryptocurrency trading involves inherited risks; consulting with a qualified financial advisor before making decisions is highly recommended.
In finance, whether we’re talking about the fiat economy and traditional assets or the more efficient and decentralized crypto ecosystem, diversification is considered a vital key for long-term success. But why is that exactly?
To fully understand the importance of a well-balanced portfolio, it is best to start by quickly summarizing the two main obstacles crypto traders (and traders in general) face in their line of work.
The first and probably most apparent obstacle crypto traders face is that we still can’t predict the future. We can take many steps to minimize the risk of error, like fundamental analysis, on-chain analysis, backtesting, and many more. Still, nowadays, even the most advanced AI modules can’t foresee every market movement 100% of the time.
Imagine that your funds are heavily invested in just two or three positions. What will happen to your balance sheet if suddenly one of those positions takes a downhill turn or, even worse, suffers the full impact of a black swan event?
While everything we’ve mentioned is valid for all types of financial assets, the unique features of cryptos and the crypto markets bring us to the second pitfall that traders must face in a volatile trading environment.
As a more transparent and decentralized ecosystem than fiat, cryptos often display higher levels of volatility than most traditional assets. This high volatility makes cryptos a more challenging asset to trade, but it also provides us with abundant potential to capitalize on, primarily through automated trading schemes.
Unlike many conventional markets, where asset prices are monitored and controlled by banks, institutions, and even governments, crypto exchanges are relatively free from price manipulation. Retail traders’ dominance over prices, coupled with the fact that these individuals don’t coordinate their strategies with one another, makes cryptos an asset with a more erratic price action than others.
The bottom line is that the world of cryptos is a volatile and unpredictable ecosystem that entails significant risks and alluring opportunities. As we’ll demonstrate later, with our crypto bots’ help, you can better manage your positions, reduce overall risk, and achieve long-term success through proper diversification by following simple guidelines.
As some can realize by now, what separates a well-balanced portfolio from an unbalanced one is diversification.
Before trailing stops and other advanced settings, and even before opting for automated crypto bots, distributing your funds among various assets and positions is still the first and most crucial step crypto traders should take to protect themselves from all the risks and challenges we’ve mentioned.
What does it mean in practice?
First, it means traders shouldn’t focus their trading on just one crypto but rather find at least 5-10 crypto projects they feel comfortable dealing with. Most experts suggest that at least some of your portfolio should focus on big, established, and highly liquid projects like Bitcoin, Ethereum, or other leading altcoins. Once you have this safety cushion, it’s okay for the rest of your portfolio to consist of smaller projects that offer a more high-risk/high-reward alternative.
When choosing designated cryptos for trading, it is also best for traders to ensure their chosen crypto projects are not heavily linked to one another since that defeats the whole purpose of risk allocation. For example, Eth and its L2s, or XRP and XLM, are heavily related projects, and their prices correlate. Therefore, although these are different projects on paper, they don’t offer us the diversification traders should seek.
Since our primary goal is to reduce the effect of any single position’s bottom line, traders should develop guidelines for managing their fund allocation. Some popular rules of thumb among the crypto community are to limit the value of each trade so it won’t surpass 5% of your total trading funds. Another standard advice is to limit your exposure to each crypto project (meaning the total value of all your open positions in a specific crypto) to less than 20% of your entire portfolio.
On top of that, many experts also recommend that traders should never be 100% invested in the market at any given point. To begin with, it is a safety measurement that could be crucial when the market swiftly turns against us. From enabling you to avoid liquidating your positions due to a margin call or simply protecting your funds from the worst-case scenario, every trader is highly advised to always keep some of his portfolios in cash in the form of stablecoins such as USDT and USDC. Another advantage of doing so is that besides security, leaving some liquid cash aside also allows you to double down on the market if an irresistible opportunity presents itself, and you must act fast.
As we’ll see later, these guidelines, combined with the variety of trading options automated crypto bots offer, allow crypto traders to design and manage a portfolio of trading strategies relatively resistant to systematic risk while still producing consistent profits.
After reviewing our general recommendations for portfolio management (relevant for cryptos and essentially any other trading account), it’s time to learn what a well-balanced trading portfolio means regarding automated crypto bots.
Similar to before, the main principle that guides us remains the same: diversification. The wide range of crypto bots, each with a unique focus and abilities, provides traders with excellent tools to help them achieve the correct structure for their portfolio.
Since most crypto traders have an optimistic viewpoint on the future of crypto, a DCA bot is a solid cornerstone for every crypto trader’s portfolio. Although DCA bots can also be used to short the market, the most common use of these crypto trading bots is to capitalize on positive momentum.
Based on the classic dollar-cost-averaging trading strategy, DCA bots are designed to smooth out market volatility and avoid naturally occurring price corrections. They can do so by entering short-term positions when prices seem to be going upward while monitoring each trade with an exit plan that allows traders to swiftly close positions at a minimum loss if things don’t turn out according to plan.
While many crypto traders might think that their focus should be solely on bullish trading strategies like the DCA, the truth is that to generate a steady and consistent income from crypto trading. Traders must learn how to master sideways trends. This is because, most of the time, assets don’t display a distinct bullish or bearish momentum but trade horizontally within a prominent price range.
As their name suggests, grid bots enable traders to set up a grid-like structure of trades within the top and bottom borders of the horizontal channel. This allows traders to capitalize on price volatility as buyers and sellers try to establish the next clear direction the market will take.
Unlike the first two bots we covered, which perform best only under specific yet probably most common market conditions, the TradingView bot offers traders unparalleled trading experience in terms of flexibility and advanced features.
Supported by the TradingView platform, arguably the best and most popular place for conducting advanced technical analysis, crypto traders can design and implement endless trading strategies. Combining different technical indicators allows traders to put all their technical knowledge and skills to work, allowing them to attain the cutting-edge necessary for long-term success.
Signal trading is a great way to diversify your crypto trading strategy portfolio in a whole new way. The logic behind this method is very intuitive. Simply put, signals trading is based on following the positions and copying the trades of crypto experts.
This is done by subscribing to one or more signal channels, subscription-based services that deliver immediate trading alerts to all users. When received, these notifications, known as signals, are automatically converted into market orders by the signal bot.
By adding a few solid signal channels and a complementary signals bot to your portfolio, you can get exposure to new cryptos and crypto trading strategies you wouldn’t necessarily interact with any other way. Through this advanced method of expert copy trading, crypto traders can enrich their portfolios very straightforwardly, which doesn’t require much time or effort.
After reviewing the basic guidelines for a well-balanced portfolio and understanding how you can further improve and diversify it through our wide range of automated crypto trading bots, we still have some final advice for traders on managing their portfolios, bots, and positions.
First, it is essential to acknowledge that the same crypto bot can function in various ways with different settings configurations. If diversification is what we aspire to, traders should avoid duplicating their settings repeatedly, creating a collection of almost identical bots. Try to differentiate your bots from one another and set up unique configurations for each of your bots. Besides the benefits of risk allocation, this will also enable you to understand the market better, what is working and what is not, and why.
For example, suppose you feel more comfortable taking more significant risks, like a less conservative stop-loss or a higher take-profit goal, when trading an established crypto like Bitcoin instead of some less famous altcoins. In that case, it is perfectly acceptable that you’ll adjust the configuration of your strategy accordingly.
Even in the backtesting stage, it can be interesting to experiment with different timeframes, as it is likely to produce different results. With no way of knowing which timeframe analysis is the most accurate in predicting the future and no two cryptos being entirely identical, it’s best not to restrict yourself to only one way of backtesting.
Last, the best way to verify your portfolio’s strength and ability to withstand everything the volatile crypto markets offer is by using our demo account before going live.
Our newly launched demo account allows traders to practice simulated trading nearly identical to live trading without any associated risks. It is an excellent tool for testing your entire portfolio before committing to and implementing it in the crypto markets. Through this simulated trading, you can see how your strategies perform, how much they correlate, and the final touches that can diversify your portfolio adequately with the right balance between risk and reward.
In this blog post, we covered one of the most fundamental aspects of crypto trading: building and maintaining a diversified, well-balanced portfolio of crypto trading bots. Diversification is clear whether it is necessary for the success and stamina of a trader’s journey through the crypto-verse.
Follow the logic behind the principles and guidelines we’ve shared today. Your portfolio should be more likely to be consistently profitable while offering adequate protection against most risks associated with operating and maintaining an active crypto trading portfolio.
For now, take advantage of all the resources you have at your fingertips when dedicating yourself to investing in crypto. Check out our wide range of crypto trading bots, a free trial, flexible pricing plans, and other trading tools, and see everything we offer for yourself.
