Each of us faces risk management at home every day. When to get up so as not to be late for work, how much to set aside on a savings account, and how much, to insurance against rainy day, how to act so as not to become a victim of scammers. A lot of this is done almost unconsciously, but when it comes to financial markets and big money, you need to act exclusively consciously.
If we talk about individual traders and investors that are most understandable to each of us, then effective risk management will come down to control and rational distribution of several classes of assets: cryptocurrency tokens, goods, stocks, securities, real estate, etc.
Of course, universal strategies have been developed that can significantly reduce most of the possible risks even at a basic level. The simplest of them involves 5 separate steps. So.
- Risk object definition. What are you willing to sacrifice? How do you feel about the very fact that you can lose something?
- Risk identification. What events can cause negative impacts? You cannot proceed without a deep analysis of the sphere of activity at this stage.
- Risk assessment. What is probability that the identified events can occur and what are the consequences? And create a ranked list so that it is clear what to work on first.
- Creating a strategy. What to do to avoid each of the risks? And what to do if the process is already running in order to minimize damage?
- Monitoring. Evaluation of both the state of the market and the results of our own reactions to prevent troubles. An important step is to understand whether the previous steps were effective or not.
Financial risk management
But all this does not always help. For example, the market may begin to move against the futures contracts. Or players may begin to hastily sell assets in order to somehow compensate for the sharp fall in value because of the banal panic and the impact of emotions.
The latter option is quite common — there are even targeted strategies that allow you to play it effectively. Most often, however, such a departure from a pre-selected behaviour strategy is observed during the periods of the “bear market” and surrender.
However, it is extremely useful to have at least some strategy of behaviour and a well-thought-out pool of possible actions. Especially if you regularly review and adapt it to the ever-changing conditions of the financial market. However, some basic mitigation actions rarely change.
The most common risks and ways to mitigate them
- Market. Creating Stop-Loss orders that will automatically sell assets in order to prevent very large losses due to the depreciation.
- Liquid. Work exclusively in high liquidity markets. That is, with a high capitalization and a large number of investors.
- Credit. The use of reliable and proven systems and exchanges that guarantee the honest interaction of the debtor and creditor. Or work exclusively with trusted partners.
- Operating. First, analyse how a particular company is dealing with this type of risk and how often interruptions in work occur. After that, diversify the portfolio. This will reduce the damage from the activities of specific companies or projects. Simply put, do not focus on just one but work with several possible options at once.
- Systemic. The same diversification. Plus, it is advisable to work with assets and shares of companies whose activities are not correlated with each other.
Conclusion
Before you start working with any cryptocurrencies, you need to understand the basics of risk management. A basic strategy will be enough, especially at first. Plus, be ready to lose money anyway — theoretical knowledge does not compensate for the lack of practical experience.
Over time, understanding will come about how to act in each situation. And the realization that financial losses in this business is basically impossible to avoid. However, it is possible to create an effective strategy to make the profits dominate the losses in time. This is the key to effective risk management.