Risk Management Techniques in Automated Crypto Trading

Welcome back to our blog, where we try to equip crypto traders with the information they need to master the crypto markets with our wide range of advanced crypto bots.

This time, let’s begin with a little thought experiment. Imagine you walk down the street and stumble upon a twenty-dollar bill. Now, imagine the happiness you’d experience and rate it on a scale of 1-10. Later that day, after ordering a beer and searching for that same $20 bill you just found, you realize you lost it. Again, try to scale your feelings of sadness from 1 to 10.

If you picked the same number for both parts of our scenario, your perception of your emotional state was likely inaccurate. Research on these types of questions, backed up by some Nobel prize-winning theories, found that repeatedly, the pain of losing something is stronger than the joy of winning. If we circle back to our example, it means that on a scale of 1-10, you’ll be more bummed out that you lost your $20 than the joy you felt from finding it in the first place.

Considering all of this, it should come as no surprise that if you want to trade cryptos for the long term with your mental health intact, it’s super important to learn how to mitigate the inherited risks of the crypto markets. Of course, this makes total sense from a financial point of view because, with a few simple steps, you can adequately manage risks and avoid unnecessary losses. Trading strategies with better risk/reward ratios tend to show better performances in the long term.

Before we go on to share our insights and recommendations on how to minimize the risks of crypto trading for a more prosperous and less stressful journey, there is no better time than now to remind you that all the information presented in this blog post is intended solely for educational purposes and should not be considered a call to action or 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. 

The Inherited Risks of Crypto Trading

Before we discuss the best practices for risk management and why we want to minimize our risks in trading, we’ll ensure you’re clear on what risks you’re trying to mitigate.

Let’s start with the obvious. Except for losing access to their funds or control over their private keys, traders should not get stuck unprepared for black swan events or any other occasions when the markets take a dramatic turn for the worse.

Big market upswings can be exciting and very lucrative, but you do not want to be completely defenseless if things don’t go as planned or if you are stuck in one or multiple positions without a clear exit point.

Except for these dramatic and relatively rare events, traders should focus mainly on adjusting their trading strategies and state of mind to the volatile trading environment of cryptos and the crypto markets in their day-to-day workflow.

Many crypto traders consider volatility a double-edged sword. It offers great opportunities but has its share of risks and difficulties; therefore, traders must handle it cautiously. As we learned earlier, profit-making is nice, but closing trades at a loss hurts more. Finding the proper control mechanisms that can reduce your losses, even at some expense over your ROI, could make the difference between occasional traders and those in it for the long run.  

Best Practices for Risk Management

As promised, here is a list of some of our best tips on how to cautiously trade cryptos without sacrificing profitability:

• Keep your finger on the pulse – In the world of trading and investments, many inherited risks can easily be avoided by paying better attention to what’s happening in your portfolio and the crypto world. The fact that you are trading through a nearly fully autonomous crypto bot does not mean that they don’t require your supervision occasionally. Make sure you are on top of things and have a full understanding of what’s going on. Don’t be afraid to intervene manually when you find information that suggests that you should trade with more caution at the moment or when necessary for technical reasons.
• Backtesting – Backtesting is a great trading tool that allows traders to design and test their trading strategies by analyzing vast amounts of historical market data, identifying repetitive patterns, and then seeking the best way to capitalize on them. By working methodologically with our backtesting features, traders can have a better idea of what has the potential to perform well in the markets, eliminate non-profitable strategies, and even optimize profitable strategies to have a better bottom line and risk-reward ratio.  
• Be mindful of leverage—Many newcomers to the world of crypto trading make the common mistake of utilizing leverage without understanding its full consequences. Trading with leverage has its fair share of benefits, but it also elevates the overall risk of your trading. Ensure you fully understand the concepts of leverage and margin calls before rolling out this tool.
• Choose the right services – As a crypto trader, your success sometimes depends on the performance of outside factors and third parties beyond your control. Whether it’s a trading bot supplier, a crypto exchange, signals channels, or even your cold and warm wallets, choosing to work with high-quality services is imperative to your success. Sub-par crypto bots, illiquid exchanges, and other unreliable performances can significantly impact your bottom line.  
• Portfolio Management – In investments, having a well-balanced portfolio is vital to achieving long-term success. This means the average crypto trader shouldn’t allocate all their funds to one trade or crypto project. The proper way to manage your portfolio is to trade various assets, ideally ones whose price is not heavily correlated with one another. Other valuable ways many veterans in the crypto space use for mitigating the inherited risks of their portfolio are to ensure that the total value of each of your trades does not surpass more than 5-10% of your total funds and also to try and avoid inserting all 100% of your trading funds into the market at any given moment.  
• Diversification – After discussing the importance of diversifying the assets you are trading, it’s time to talk about why it’s essential to diversify your trading strategies, and if you choose to focus only on one kind of trading, to at least create different combinations of advanced settings that will allow you to exploit market conditions in other ways. Since the market can be unpredictable at times, it’s better to have a variety of trading bots on hand to be fully prepared for different scenarios. With many companies like ours offering a bundle of trading bots even in a free plan, it should be easy for traders to execute various strategies simultaneously, ensuring a well-balanced collection of strategies with less exposure to any specific risk.
• Advanced Settings – Many of the more advanced crypto bots in the market today, like the ones we offer, come with many built-in features that can help traders reduce the risks and drawbacks of their trading strategies. From take-profit goals that can assist you in closing your trades on time to other settings like trailing-stop and stop-loss that can help you limit your losses, traders should thoroughly learn all of the different settings and capabilities of their automated trading tools that can help them achieve better risk/reward ratios.  
• Demo Trading – Like most veteran crypto traders will tell you, there is zero advantage to taking a strategy live without testing it first, and many drawbacks. Our new demo account is designed just for that: to enable traders to test their trading strategies and signal channels in actual trading circumstances and under real-time market conditions without any associated risks. It is always better to be unpleasantly surprised in practice with paper money, not while trading live with your hard-earned cash. The world of cryptos is always full of potential opportunities, and there is no need to rush and risk your funds on trading strategies and signal channels you haven’t tested for yourself firsthand. 

If you follow these guidelines, you can better manage your positions and emotions, enabling you to become a more relaxed, consistent, and profitable crypto trader.

Final Words

OK! We’ve covered a lot of ground here today.

We started by answering the not-so-trivial question of why we should do everything in our power to mitigate the risks of crypto trading to the bare minimum. Then, we discussed the two main types of risks crypto traders face in the markets and wrapped things up as usual with some practical advice for the future.

If you’ve opted for crypto bots and automated trading, you’ve already made the first and most important step towards trading cryptos cautiously. In case you haven’t, there is no better time than now to enjoy our free plan or sign up for our two-week, no strings attached free trial to test out our more advanced plans and see for yourselves how we can help you improve your trading experience and results. 

From a wide range of advanced crypto bots, accompanied by step-by-step video tutorials and other useful resources, here at Cornix, we are here to give you everything you need to take your trading skills to the next level.

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