I was getting asked more details about risk management so I decided to put them down on paper for all of you.
Personal Trading Psychology
The first thing you need to do before you create a portfolio is to ask yourself a cliché question: who are you? More specifically, when it comes to trading:
1. What kind of person are you?
2. What are your skills?
3. What do you want out of trading (and what can you provide)?
4. How can you achieve your goal?
What kind of person are you?
Self-access who you are in your daily life. What is your personality? Are you living a busy life? Do you have the time to read or stare at a chart all day? These things are preliminary to how you can operate as a trader. If you’re too busy you may have a hard time hustling to look at charts because you’re tired or between tasks. Use this to your benefit. Look at charts when you have proper rest or when you find a good time to do it. Understand who you are before you even begin.
What are your skills?
This is very important- you need to figure out what kind of trader you are. Are you could at scalping trades? Are you better at swing trades? Do you believe fundamental analysis is key to making an investment? Discover your strengths and weaknesses here. For me personally, I’m better at higher time-frame trades and swing trades. I’m generally not too great at scalping. Discover your talents and take advantage of what you already are capable of to hone in on those skills.
What do you want out of trading?
What’s your goal? Do you want to make money? If so, how much and for what purpose? Really strive to figure out that reasoning and keep asking yourself those questions. This will help you better understand yourself as a trader and make decisions toward this outcome.
How can you achieve your goal?
This is the area that focuses more on yourself in a future tense. What can you do to better yourself as a trader? What are the strengths you have that you can polish and advance? What are the weaknesses you have that you can negate or learn from? Discover your improvements and how to learn.
Portfolio Allocation
How intentional is your portfolio? Are you buying all on one specific coin? Are you diversified but buying coins that just sound cool? Are you trading coins that have no buying volume or are subject to high volatility?
Have a diversified portfolio
It’s important to have a portfolio of different things. Mainly the reason for this is to create security but also to help with profits. If you have one stock for your entire portfolio, you are at the mercy of whatever price action that stock is doing. Diversified portfolios help with hedging yourself against losing too much. Some stocks move faster than others and some barley move. Use this to your advantage. In crypto for instance, it’s generally wise that if your trying to maintain $BTC value instead of Fiat value — to keep a certain part of your portfolio as $BTC to maintain the value. It’s also VERY IMPORTANT to say it also depends on the market — if we are in a bear market, then keeping tether and fiat helps to raise your BTC value as Bitcoin drops. It’s also important to separate your portfolios based on use. Here’s a look into my diversified portfolio:
1) Active trading portfolio
2) Scalping portfolio
3) Small cap portfolio
4) Long term investments
5) Backup FIAT
This helps me personally maintain a balance. Yours will likely be different but balancing your portfolio is very important. Have reasons for your choices too. Don’t buy a stock simply because it has a good sounding name. Look at the charts and see if the possibilities of it match your investment strategy. Also, there’s a good chance that as the market takes its cycles, some stocks will require more fundamentals in order to succeed. Know when to say goodbye to a stock. Also look at how much daily volume a stock gets on average. Less volume will bring in less movement and you could be stuck with it if you ignore this.
Risk Assessment Strategy
You may have an idea of what coins you want to trade and some basic goals…but what about risk? Why is it important? Can you risk too much? Can you risk too little? How do I prevent risks for damaging my portfolio? Is there a good plan?
Why is it important?
Creating an assessment for risk helps you know for sure what your doing with your portfolio. This shows the amount of money you adding to a trade or the market that your giving exposure for it to fluctuate- either for profits or loss. You need to take a look at what risk is doing to your portfolio to help make sure your not over exposing yourself in trades or just keeping 100% in tether all year long.
Can you risk too much?
Absolutely! It’s not wise to put 100% in any coin and it’s good to give yourself a hedge by keeping part of your portfolio in areas less risky. It’s all risky to always use large amounts of leverage in trading as that can really hurt
Can you use too little?
I always emphasize on protecting your capital, but if you don’t have at least some exposure then your not trading…your just holding on to money. Take a look at what kind of risks your taking in trades and their consequences.
Prevention of risk
Risk management isn’t about reducing risk — it’s about taking care of risk and be prepared for risk. Risk can’t always be reduced but the effects certainly can by using stop loses, staying out of bad trades, etc. It’s not meant to prevent you from getting dirty but it’s there to help you take a shower if you get dirty.
Is there a good plan?
Yes. Make a plan for when things go bad — always prepare for the worst. Create stop losses or points where you need to be done with a trade. Create a plan to take profits when risk has increased. Be careful about the percentage of portfolio that you use. Be watchful about leverage. Have backup plans even for things like exchange hacks, password protection, and a coin you picked has gone to $0.
Conclusion
I hope this second part to my original article was more helpful and helped you to visualize your goals a little better. If you need to write down a plan of action on paper, so be it. If you need to put it down on an Excel spreadsheet, do it. Whatever you have to do to succeed, do it. Everyone is different, so everyone will achieve their goals differently as well. Cheers!
