The fact of the matter is that you can lose money in cryptocurrency rather quickly. That is why it is vital to have proper risk management in your manual and bot trading processes.
Professional traders stay in the game because they know that management is critical when dabbling in the cryptocurrency markets.
Volatility in crypto makes for substantial opportunities to make money and even more opportunities to lose money. It is up to you to learn, grow, and become the best trader possible by conducting the best techniques.
But what risks are there in cryptocurrency, how to manage them and how does it apply to trading bots?
What is Risk Management in Trading?
This is essentially the minimization of losses on your account. A good trader understands that trading not about what he earns but what he can walk away with at the end of the day.
A trader can work real hard and make small trades that add up each day only to lose a substantial portion because of some misplaced trades.
If you are looking to be a trader for the long-term, you need to make sure to keep in line with a straightforward principle, “plan the trade and trade the plan.”
Thanks to technology and automation, one can find a variety of ways to minimize risk in trading with the right and proper plans.
Automated tools allow traders to practice trading without human emotions and can help to augment capabilities leading to potential profits. Using computerized tools may serve as a compelling the management proposition within itself, but there’s still much more to learn within this process to enhance risk minimization strategies.
TOP TRADING BOTS
Controlling the Human Aspects When Conducting Bot Trading
The human element is critical in trading, even when using bots or automated options.
Common errors and issues faced when using bots are that the human trader behind the script doesn’t have the right characteristics or traits due to a variety of factors.
Here are some of the most frequent issues that traders must overcome after they have set up their bot and conducted their trading process.
A Significant Lack of Patience
Most investors and traders fail because they fail to let the system run itself out and stick to its parameters. Starting traders get impatient with their bot and have wrong expectations when working with their algorithms. Be patient with your process, your system, and your bot to overcome this obstacle and issue.
Interference
A lack of patience leads to significant intervention by the trader, amplifying losses, and minimizing learning. Remember that strategies such as scalping, becoming a market maker, conducting arbitrage, and other plans require the trader to reduce interference and let the bot operate by itself to bring in the right profits. Traders will have to step in at times, but too many traders step in too frequently.
Laissez-Faire Attitude
Many traders forget to place a proper risk-safe strategy in place and harm themselves in the short and long-term. They act more haphazardly and don’t take the time to list out their goals, their intended strategies, and their position amounts.
Cognitive Biases
Know that all traders suffer from anchoring or recency bias. Traders apply these terms when implementing their accounts and do poorly because of these biases. Watch out for anchoring, a phenomenon where one current action to events and contexts that took place in the past. Further, watch out for recency bias, where one lets the recent past color trading that takes place now.
Knowing the Bot
You will want to know how your bot works, what features it has, potential vulnerabilities, and other factors associated with the use and effectiveness of your tool. Be very careful in how you store information and where you access your bot from as there are incidents of hacking trading platforms and API Key theft.
Black Box Bots
Please know that black box bots can be very tricky and may not be as simple as you think it might be. Black box products offer simplicity and almost guaranteed profits but this may be a fallacy. Never give full access to any products and always have some form of control in withdrawal, exchanges, and other options related to trading.
Start With Minor Funds
You must start with minor funds to test out your strategies before growing it and adding to your allocations.
Key Factors in Bot Trading
The first crucial aspect of conducting risk management with automated trading is to understand the correct solution to use. This initial action is essential because the proper bot will help you to minimize your risk. Efficient solutions will produce the best results by offering the right strategies, adequate integration, and the correct pricing for the product.
Remember that risk minimization with trading bots start from the beginning in understanding the competency and quality of the algorithm itself compared to your goals and strategies.
Account Sizing
One critical factor to pay attention to is the amount of your portfolio that you can afford to risk on every single trade. For instance, a few traders may allocate 3% of their total portfolio to a strategy such as momentum trading. Then they may allocate 4% of their complete portfolio to a scalping strategy trade.
Account sizing is quite critical when working by yourself and with bots because it will help you to minimize losses and help you prepare for unwanted scenarios. Remember that the bots, with the right parameters, will make sure to close individual trades out before one realizes significant losses, but it always helps to pay close attention to how it is set up.
Further, account sizing is crucial because it allows one to understand how much equity one should allocate to each strategy overall.
Remember, in account sizing; you want to understand how much you should allocate per strategy, then you want to set up how to assign a value per trade. Traders may be expected to have 10% – 15% allocated to their bot actions to minimize risks overall.
It will always depend on the trader and how they see the risk to reward ratio.
Note that traders account for hidden issues when doing account sizing in risks such as issues that may occur with bots, connection to the exchange via the application programming interface, and potential problems with the exchange itself that may affect trades.
But if a trader knows how much total exposure they have to their automated trading options, they can surely mitigate their risk to all of these issues and factor that in.
Account rebalancing
Remember to conduct proper account rebalancing to let the bot perform adequately over time. You do not want to let the script go through a period of issues and trade with smaller amounts of money that would hamper your profit-making possibilities.
Conclusion
Always understand your core skills as well as how your bot will function to minimize risks and losses over the long term. Automated trading can be quite profitable if traders have the right patience and learn the right skill set over time. Don’t ever throw caution to the wind and always trade responsibly, even when using a bot.