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Why thinking about managing risk is key

Why thinking about managing risk is key

Let's be honest. How many of us have felt drawn to the crypto space because of the highly volatile aspect of the market. The great runups we have had in recent years in the market have opened up great opportunities to look for an extraction of profits from the markets. Trading is one of the ways one can do this. By an attempt of participating in the market through the act of buying and selling of assets it is indeed possible to generate great returns. When considering these possibilities it is only natural to feel the urge to jump in, and dream about the profits you might make in the future.

Spend your energy wisely

Getting involved is relatively easy, and if you are making profits then it is easy to forget about one of the most important aspects of trading. But with every opportunity, there comes risk. This is unavoidable. In order to gain something, one must take risks. This is one of the fundamental laws of trading. However, while equally important this is sadly a topic that is often overlooked. What if your trade does not work out? Instead of generating a profit, you will instead lose profits or worse, deplete your portfolio. Therefore, while it is tempting to only look at the sunny side of things, spending a significant amount of energy on considering the risks and acting upon it is where most traders go wrong. What lies at the roots of this, and what mindset do you need to obtain in order to set the stage for a healthy approach to the markets?

Stop looking for certainties

When attempting to trade the markets, it is natural human behaviour to look for confirmation and arguments that you have made the right decision. Often this happens outside of the markets, as one looks to verify their choice made from sources like news, quotes from prominent figures, or indicators purchased from so-called trading gurus. While often you may have read or heard about risk management, its actual meaning if often heavily overlooked. One cannot simply be profitable without taking risks, it is just the way it works. This simple sentence also reveals a hidden truth. While you are potentially looking at a great opportunity, there is always a chance that the opportunity might not play out. The reason for this is irrelevant, because they usually become clear after it has already played out. Instead of looking for certainties to make you feel better about your decision, simply accept that there is a probability it might not play out, and incorporate this in your idea. Looking for certainties, gives you a false sense of confidence.

Think before you act

For the less experienced traders, the process described above often is being put in motion after one has already taken up a position. This is highly unfavorable, as this can lead to heavy emotions. This means that from this point on, any decision you will make while managing your position is led by inconfidence and is solely fed by emotions. You can easily get rid of this by simply making a plan before entering into a new position. Having an entry point, invalidation, and target set before taking any action can help take away the emotional side of trading. Putting in the work before, makes trading much easier, as you only simply need to follow the plan. If the trade works out, great. If it doesn't, then there is going to be another opportunity soon. Taking losses is normal in trading. Key is to keep them small, and let your wins be bigger. Therefore focus your energy on your preparation, rather than running after yourself.

Take your responsibilities

Once you have taken on a position, then take your responsibilities. Follow your plan, and take profits where you said you would. If you dont it can simply be classed as greed. If you do not take profits in time, then you might have been in a nicely profitable trade, only to end up in a losing trade later on. The same goes for cutting your losses in time. Take your responsibility and if the trade did not play out, simply get out. A small loss is really not a problem, but if left unattended the loss can lead to damage in your portfolio beyond repair. Therefore, take your responsibilities, and follow your plan. Trading is a marathon, not a sprint!

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Disclaimer: The information provided above is not financial advice but for educational and entertainment purposes. Please do your own due diligence or consult a financial advisor before investing in any digital assets. All opinions expressed on this article are opinions of individual traders using the Bitget platform and do not reflect the opinions of Bitget or its affiliate companies and partners. The author’s opinions are based upon information they confirm to be reliable, but neither Bitget nor its affiliates warrant its complete accuracy, and it should not be relied upon as such.