Tips on Reducing Risks When Trading Cryptocurrencies
Beside the immense tech possibilities and breakthroughs of blockchain, many people are interested in trading tokens and coins for the vast amount of income it can bring. But not until you understand the many risks that could stand your way to achieving this and learn how to reduce or at least manage those risks when trading. It may take time and practice but it is possible.
There aren't MANY hidden tricks and so the first simple and basic step is to find what those risks could be, then you can become a better trader.
Therefore, beside the common mistakes and risks such as losing funds because you shared your private key, losing funds because you clicked on a malicious spammer or hacker code or link, and losing your funds because you never backed up your wallet, -- which are the mistakes and errors covered in our previous article and which you should also avoid -- below are some tips on how to avoid risks when trading Bitcoin and all altcoins.
1. Know how to estimate your entry and exit points
The entry point is the point at which you start trading any altcoin or crypto, and starts from determining whether the buy or sell is a worthy action at a given time, to the point of closing the sale or buy. For instance, proper setting of your buy or sell prices is very important to know, otherwise, you might be forced to sell or buy at a lower or higher price than intended.
Looking at the order books, you might want to analyze the buy and sell walls at any particular time using market depth charts (or the order book depth) which uses the sum of coins available for buying (buy orders) and compares the sum with the sum of coins available for selling (sell orders) and displays them on a stacked area chart.
When there are much higher amount of buy orders than sell orders, a buy wall (green walls) appears. This is a good sign since more people want to purchase than want to sell and buy orders will fill at increasing prices. That could be a good time to buy and the intention is to buy at lowest possible price for a cryptocurrency.
Thus the market depth chart allows you to estimate whether the price will go up or down depending on the two volumes. Strong trends should be when you add to your position or you can lock in profits by scaling as time goes.
However, if the sell wall (red wall) is high -- which signify much more people are willing to sell than buy. In other words, there are more sell orders. The latter could signify hard times ahead for the cryptocurrency involved.
Besides, you can look at plain order books in order to determine the best price when placing a buy order for a given number of cryptocurrency. That should be the lowest price possible for that amount of cryptocurrency (number of coins you want) if the exchange works by way of order matching. Otherwise, you might not have to worry about it if orders can be filled partially. The same applies for when selling, by looking at the highest possible prices from the
Knowing how to spot fake walls is also a necessary strategy towards this end. These walls are put for market manipulation and pumps or dumps. They appear as either the lowest sell order/highest buy order on a crypto exchange and do not have a price runway and appear tall/vertical. They are set in order to convince other traders of a particular price movement and therefore the sentiment itself is not true and there is no big market support for the intended trend.
Usually, fake buy walls are unfillable orders set to create a high charged sentiment for a cryptocurrency. They lead most traders to think that the current price point is going to hold and will lead them to think that the current price points are the new floor. These orders and respective trends are somehow unpredictable since the orders can be removed any time.
That does not mean pumps and dumps can't be profitable for those who know there are. Therefore, if you do, it is one of the best times to make money: otherwise, for everyone else, it is a very dangerous eye candy.
Other than using the order books to determine entry points via buy and sell walls, you can combine that strategy with some basic technical analysis techniques we recently talked about since order books are rather very short lived ways of estimating prices or entry points. For instance, most people bet on the support as entry points and resistance as exit points.
With regard to technical analysis, it is not hard to identify the key support and resistance levels in order to come up with an exit and entry strategy ahead of time.
Finally, ensure to determine the risk to reward ratio and set your targets for taking profits. Setting stop orders can also protect yourself from loses in case the market is moving against your expectations, although they are not always effective when the price moves too fast and you may get a bad fill due to slippage.
2. Observe a percentage reserve rule and hedge via diversification
It is advisable to keep around 20-30% of your holdings or some other pre-determined percentage of holdings and instead, use leverage to increase trades and earn more profits. Therefore, never trade with 100 percent of your holdings. Because, for instance, if something happens to the crypto exchange when you are keeping 100 percent of your holdings there, you might lose all of it.
Having come up with a percent that you can invest into crypto trading, you might want to spread risks by trading in more than one platforms. For instance, some could trade in at least 5 exchanges. For instance, trades on one could offer more profits than the other and if something bad happens on one, then you won't lose all the money.
Operational risks include operational risks such as security, hacks and others. Most crypto exchanges, even the centralized ones, now undertake measures to secure users' cryptocurrencies such as storing funds in cold storage. However, users would still need to take more personal responsibility in order to avoid security breaches as listed here. For instance, you will need to take care of phishing email campaigns, fake websites that capture wallet or exchange log in details, among many other vulnerabilities such as fraud attempts.
Decentralized exchanges are also a little bit more worth in order to reduce operational risks such as hacking and other security breaches.
One more caution about DEXs though is that most will struggle with low volumes or the commonly referred to as liquidity, such that you won't be able to sell large amount of coins once you invest in them. The obvious argument is that you might crash the price if you tried to sell large amount of altcoins and many would fear price swings. Therefore, a more rather workable strategy could be spreading the risks among DEXs and other types of exchanges that allow you to trade large volumes.
3. Get into the next wave of social trading
Cryptocurrency trading today is more of a "social or crowd-operation" than a "solo-operation" where you can learn the efforts of others -- even whales -- and use them to make your trading better. For instance, with some trading platforms (including several decentralized exchanges and platforms such as StockTwits, eToro, and WhoTrades) and wave of tools (including crypto portfolio tracking tools such as those usable on mobile ), you are able to view other people's portfolios and trading moves, read updates on their news feeds, as well as look at their overall performance in trading cryptocurrency.
With Covesting.io, for instance, you are able copy crypto trades and moves made by other investors
The next thing is to move with innovation. Upcoming platforms such as Rublix will connect users with trading experts and learn from the successful patterns of top investors, such that users can gain credible analysis and strategies and therefore invest with more ocnfidence.
Rublix will integrate TradersEdge platform to let users carry out in-depth analysis such as nteractive charting mechanisms, enhanced indicators, and several other trading tools.
Besides that, you can use variety of social tools such as these that equip you with up-to-date information and news or events that are likely to influence prices in the short run.
4. Quality quality quality
Quantity trading will not always render higher profits. Number one tip is identifying quality trades that will increase performance while reducing the amount of time that keep coins on an exchange. While it may take time and lots of attention, quality trades are basically those that allow you to buy at less amount of money and to sell at the highest price possible.
5. Automate and reduce errors but complement with manual processes
Algorithmic strategies and arbitrage trading bots, are among the many tools we talked about that can make your crypto trading easier. They allow you to automate trades as well as reduce price estimation errors that could increase risks and cause you to make losses. Instead of manually doing it, you can use them to watch prices and exchange rates for you, and even handle actual trading and other things. However, they come at a cost, with most being offered at a subscription fee.
There are many trading bots that you can use to reduce risks in the market when trading cryptocurrecies and they will cut out loads of manual processes and the complexities.
Most AI and machine learning bots will allow you to use known algorithms and strategies developed by experts and use several indicators to predict prices. Examples include Gunbot, Haasbot, Profit Trailer; Cryptohopper; Gekko and Cryptotrader among many others. However, ensure you can use those that are profitable.
However, you can also use trading bots that allow you to set your own algorithms. This is important because while bots can be automatic, they cannot factor fundamental analysis, breaking news, insider knowledge and the myriad other factors that make markets move. Therefore, you should actually try to complement manual and automated methods of trading.
6. Use leverage but avoid using excessive leverage
Leverage is where you borrow some money to invest in cryptocurrency, which allows traders to trade cryptocurrency and earn more profits even with a small capital. Margins are good because they will increase the six of the order and allow flexibility of going long or short. However, a forced liquidation can squeeze you too much and force you to lose the entire principle if there is too much principle.
For instance, while you can afford a leverage as high as x100 on some cryptoccurrency exchanges, a 1% move against you can destroy your account.
It is advisable to go for a leverage of x3 when trading, which will allow you to increase gains and while providing enough of a buffer zone to exit a bad trade. The exception is to scalp smaller time frames during volatile markets. The longer you hold the less leverage you would want to use. Additionally, volatility in prices increases on high leverages.