Risk Management - The Basics of Not Losing Money
Why Risk Management Matters
The cryptocurrency market is highly volatile, with prices sometimes moving 10-20% or more in a single day. While making profits is important, avoiding large losses is what allows you to survive long-term.
"Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1." — Warren Buffett
Setting Your Investment Amount
Only Invest What You Can Afford to Lose
Money invested in cryptocurrency should be an amount you can lose entirely without affecting your daily life.
Never use these funds for investing:
- Living expenses, rent, tuition
- Emergency fund (minimum 3-6 months of expenses)
- Borrowed money
Percentage of Total Assets
There's no fixed rule, but allocating 5-20% of your investment portfolio to cryptocurrency is a conservative approach. Adjust based on your experience and judgment.
Dollar Cost Averaging (DCA)
Dollar Cost Averaging (DCA) is a strategy of buying a fixed amount at regular intervals. It's the most recommended basic strategy for cryptocurrency investing.
How It Works
Example: You want to invest $1,000 in Bitcoin
| Method | Approach | Risk |
|---|---|---|
| Lump sum | Buy $1,000 all at once | Could buy at a high |
| DCA | Buy $250 weekly for 4 weeks | Averages out the price |
Why It's Effective
- Reduces the risk of going all-in at the top
- No need to time the market
- Removes emotional decision-making
- In downtrends, you buy more coins for the same amount
Cautions
- Blindly DCA-ing into a coin in continuous decline is risky
- Focus DCA on proven coins like Bitcoin and Ethereum
Stop-Loss and Take-Profit
Stop-Loss
Selling when you reach a predetermined loss threshold.
- Typically set at -5% to -10% below your buy price
- Frees you from the fear of "what if it drops more"
- Can be automated using limit orders
Take-Profit
Selling when you reach your target profit.
- Prevents profits from disappearing due to greed
- Partial take-profit is also a good strategy
- Example: Sell half at 30% profit, hold the rest
Risk-Reward Ratio
The ratio of expected profit to potential loss.
Risk-Reward Ratio = Expected Profit / Acceptable Loss
Example:
- Stop-loss at 5%, take-profit target at 15% → Risk-reward ratio 3:1
- With a 2:1 ratio or better, you can be profitable even with a win rate below 50%
Position Sizing
Deciding how much of your total capital to allocate to a single trade.
The 2% Rule
A principle frequently used by professional traders:
Adjust your position size so that you never lose more than 2% of your total investment capital on a single trade.
Example:
- Total investment capital: $10,000
- Maximum acceptable loss: $200 (2%)
- Stop-loss level: -10%
- Position size: $2,000 ($200 / 10%)
Diversification
Don't put all your money into a single coin.
- Focus on major coins like Bitcoin and Ethereum
- Allocate only a portion to altcoins
- For high-risk assets like meme coins, only invest what you can afford to lose
Emotional Management
FOMO (Fear Of Missing Out)
The anxiety of "everyone's making money except me" leading you to chase pumping coins. This usually results in buying at the top.
FUD (Fear, Uncertainty, Doubt)
Panic selling at the bottom due to fear, uncertainty, and doubt. A major cause of significant losses.
How to Cope
- Follow predetermined trading rules and avoid impulsive decisions
- Don't check charts too frequently
- Don't be swayed by exaggerated information on social media
- Keep an investment journal to objectify your emotions
Pre-Buy Checklist
Before pressing the buy button, ask yourself:
- Do I understand what this coin is?
- Is this money I can afford to lose?
- Have I set a stop-loss level?
- Is my position size appropriate relative to my total capital?
- Is this decision based on analysis, not FOMO?
If any answer is "no," hold off on buying.
Next: Fees and Taxes - Costs You Should Know Before Investing