In the trading environment, risk management is one of the most important aspects required for generating profits and protecting capital. Whether you are trading Ethereum, one of the popular cryptocurrencies or forex, the foreign exchange market, it is of utmost importance to know and apply certain principles of risk management for one to succeed in the process. This article looks at different risk management techniques suitable for trading in Ethereum and Forex.
Understanding the Markets
Ethereum Trading: Ethereum is a cryptocurrency that is second in the market capitalization and is considered to be highly volatile. The prices can vary greatly in the short term due to various factors including market sentiment, technological changes, policy changes and even macroeconomic factors. Traders can only benefit from the fluctuations in the prices to make profits in such a situation.
Forex Trading: It is the most significant and famous market in the world of finance with a daily turnover of trillions of US dollars. It entails the buying of one currency with another, for instance, the EUR/USD or the GBP/JPY. The forex market is shaped by political events, economic figures, monetary authority actions and investors’ expectations. Nonetheless, if you decide to switch from ETH to USD, you should know that the same as any other form of trading, Forex has its risks that stem from leverage and changes in the exchange rates.
Key Risk Management Techniques
The management of risk is a critical factor when it comes to trading particularly when it comes to Ethereum and forex markets. Some prevention measures that can be put in place to prevent losses and ensure that your investment capital is well-secured are quite efficient. The following paragraphs will outline several vital risk management strategies that can augment your trading strategy and boost your chances of earning profits over the long term.
Diversification
Diversification is the act of putting your money into different types of investments to minimize the risk of one type of investment. In the context of Ethereum and forex trading, diversification can be achieved by:
- Choosing to trade more than one currency pair in forex instead of selecting only one currency pair.
- Dedication of part of your portfolio to Ether and the other part to the forex market.
- Adding other coins/tokens or other assets to your trading plan.
- Diversification is useful in lessening the effect of any given market’s movement on your investment portfolio.
Putting up Stop-Loss and Take-Profit Orders
Leveraging, which is imperfect, comprises of stop-loss and take-profit orders, which are good management tools.
Stop-Loss Orders: These orders bring the market to a stop by the preferred price which is useful in controlling losses. For example, supposing you bought Ethereum at $2,500 and also placed your stop-loss order at $2,300, once the Ethereum price collapses to $2,300, your order of stop-loss is triggered and you will not lose in this trade.
Take-Profit Orders: These orders help in selling a position when it reaches a particular price or to take profit in other words. If for instance, you choose to place a Take Profit at $2800 your position will be closed at $2800 and you will lock your profit.
Using Leverage Cautiously
Leverage is used to control large exposure with a small amount of capital. Leverage on the other hand helps to increase the returns but at the same time exposes the investor to higher losses. Both Ethereum and forex trading platforms offer leverage, but it should be used with caution:
- Know the leverage ratio offered by your broker and how it may affect your trades.
- Avoid using maximum leverage. Rather, it should employ low risk or what can be referred to as conservative leverage to manage risks.
- Look for margin requirements and margin calls that happen when the balance of your account is not enough for the positions you have taken.
Position Sizing
The term position sizing is the process of identifying the amount of money to be put at risk per single trade. Effective position sizing involves:
- To determine the risk per trade it is preferable to express it as a percentage of the overall trading capital. The general guideline is to not expose more than 1-2% of the account on a single trade.
- The management of the position size according to the volatility of the asset. To clarify, it would be best to take a lesser amount of Ethereum for instance due to the higher fluctuations in price.
Hedging
Simply, when hedging, one is really forced to open positions of the opposite type to mitigate risk because of price change. In Ethereum and forex trading, hedging can be really implemented through:
Direct Hedging: The action of embracing the conflicting version of the same tool as a standard. For instance, if one has longs in Ethereum, he or she can take short to reduce risks in case the price goes down.
Cross-Asset Hedging: The following are the correlated assets in use in hedging. For instance, if you have a long position in Ethereum, you can take a short position on Bitcoin since the two are assumed to be related in some way.
Conclusion
Risk management is an area that is vital for every trade done in both Ethereum and Forex because it is one of the determinants of the trade. Some of the ways that can be put in place as a means of assisting in capital protection include; diversifying the assets, placing stop loss and take profit orders, the right use of leverage and correct management of positions.
