CANDID ADVICE

TRADING RISK MANAGEMENT STRATEGIES FOR BEGINNERS
(Part 2)
Before opening a trading position or allocating capital to a portfolio, traders and investors should consider creating a risk management strategy. Still, it’s important to keep in mind that financial risks can’t be completely avoided

Hedging:

Hedging is another strategy traders and investors use to mitigate financial risk. It consists of taking two positions that offset each other. Simply put, traders can hedge one trade by making an opposing trade of similar or equal size

It may seem counterintuitive to enter positions in opposite directions, but if done properly, hedging can reduce the impacts of a market move. Ex: imagine that you are long BTC and holding it in a personal wallet. If the market enters a downtrend, you could take a short position to offset your long position without having to move your BTC. This is what we call a market-neutral strategy

Diversification:

As the old saying goes, you should not put all your eggs in the same basket. In other words, diversify your portfolio. In theory, a well-diversified portfolio offers more protection against massive losses compared to a portfolio made up of only one single asset. If you hold a crypto asset in a diversified portfolio, the maximum damage you would receive if its price tumbles is a percentage of your portfolio. On the contrary, if your portfolio is completely made up of a single asset, then you could potentially lose 100% of your portfolio’s value

Risk-reward ratio:
The risk-reward ratio calculates the risk that a trader will be taking relative to the potential reward. To calculate the risk-reward ratio of a trade you’re considering, simply divide the potential loss by the potential profit. So if your stop-loss is at 5% and your target is at 15% profit, your risk-reward ratio would be 1:3, meaning that the potential profit is three times higher than the risk

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