Automated Risk Management in Cryptocurrency Trading

Trading in cryptocurrencies comes with risk, as well as any other market speculation. The crypto market has proven to be volatile and traders need to find ways to manage risk and hedge their investments in order to prepare for bad cycles.

There are strategies and tools available to crypto traders that can help deal with risk as well as automate most of the process. The best asset when it comes to risk management, however, is a good and careful analysis of the market and the cryptocurrencies that you trade.

Risk Management Strategies

There are a few common risk management strategies that every crypto trader needs to be aware of. These allow the use of technology, mostly AI and bots to take action and plan trades according to the most recent data. The most famous of these strategies include:

•       Automating the take profit and stop losses orders.
•       Using bots to execute hedging orders, based on the event that the trader sets.
•       Using statistical arbitrage to avoid unnecessary risks.
•       Employing spread trading, by automating trades.

All of these strategies are dependent on the size of your portfolio, preferred asset classes, and how risk-averse you are in general.

How to Choose a Risk Management Strategy for You

The main goal of a risk management strategy is to prevent you from failing in your trades. Since bad trades will always happen and the value of cryptocurrency depends on outside market forces, all that you can do is limit those failing trades by putting brakes on an automated process in crypto trading.

The key to this is to know how much you’re willing to lose. It also helps to stay on top of the latest news and developments in the world of cryptocurrency. Education sites such as CryptoManiaks  (https://cryptomaniaks.com) can help with that, since it’s a dynamic industry and new developments are common.

Take Profit and Stop Loss

This strategy allows the traders to automate when their trading bots will take a profit or stop a loss on a single trade. The trader sets up the parameters of what is a loss and what’s considered a profit and the bot will act based on it.

The key is to set realistic goals so that you don’t hold your trading position for too long and end up losing. No AI can help with that, it’s up to a trader to make the decision.

Hedging Bots

Hedging is a term used in finance that refers to protecting your portfolio by placing some of your assets in positions counter to your other positions. That way you end up profiting at least a certain some regardless of the way the market will end up turning.

Bots can be used to organize such a marketplace. The process is simple:

•       One bot is set to trade on the long Bitcoin position
•       Another bot opens a leverage short position.
•       The second bot is triggered once the position gets close to a stop loss.

This way both the positions are covered and you end up with an automated hedge.

Statistical Arbitrage  

Statistical arbitrage is a process where artificial intelligence is used to scrap as much data about cryptocurrencies as possible. Bots are then used to trade on both the short and long positions determined by this data and therefore create a hedge with little chance of ending up with a loss.

The turnover rate for this kind of trade is very high, but the margins are low. This means that it isn’t an option for those who don’t have the budget to trade in such a manner.

Automating Low-Risk And Low-Reward Systems

Spread trading is an old method of hedging your investments. However, it’s the use of AI and bots that have made the process automated and therefore much simpler for everyone involved. The system works as follows:

•       Choose an asset with enough volatility.
•       Find a related asset that is equally volatile.
•       Use both to simultaneously buy and sell both.

For instance, some cryptocurrencies have an alternative that’s based on similar technology but oriented towards a different, usually smaller market. Those are the pairs that you should trade at the same time so that the losses cancel each other.

What Features to Look for In Automated Crypto Trading System

Automated cryptocurrency trading systems come in many forms and they can be a lucrative addition to your tools. However, before deciding on bots and AI to use, you should look for a few features that will allow you to get the most out of the system and customize it to your needs.

Adjustable settings

There’s no way to decide which kind of risk is tolerable for every investor. It’s a matter of personal circumstances and personal attitude. That’s why the automated system needs to have adjustable settings and every trader should be able to set up the parameters for themselves.

Reliability and consistency

Back testing and regression analysis are key when finding an automated risk management system. Regardless of how complex the system is and what kind of tinkering you can do with it, it won’t do you any good if its predictions aren’t correct. There are a lot of tools in this line of work and looking for better ones is a part of the process.

Adaptability

A crypto management system needs to be adaptable and flexible. That means that if you want to use the same system with different types of assets, platforms, and markets, you should be able to. It should also maintain all of its features and predict the markets equally well.

Affordability

Risk management is an investment and so are the tools that you’ll use to manage the risk. This is an out-of-pocket expense for a novice investor in cryptocurrencies, but a necessary one. That’s why it’s important to find the tools that suit your needs but that are also affordable and aligned with your budget. As is the case with most purchases, it’s a balancing act.

User Protection

All of the features we mentioned are powered by AI and therefore they are subject to glitches that come from using AI. They need to come with user protection that will guarantee that the quality of service won’t be affected by any potential AI issue.

A Shape Of Things to Come

Cryptocurrencies have already gone a long way from a tech novelty to a respected field for investors and an accepted (even recommended) payment method. Chances are that the industry will grow in the years to come, but that it will also be more regulated than it is today.

AI which is used to automate and power most of the risk management tasks we mentioned is also a new technology and it will expand, grow, and improve in the years to come. Its application in the world of trading will grow along the way, as well.

To Sum Up

Risk management is an important feature of every trade and therefore of cryptocurrency trading as well. An investor needs to set up tools and crypto guides that will allow them to hedge their investments and lower their risks wherever it’s possible to do so.

A lot of the process can be automated and left to bots as long as the investors are the ones setting up the parameters. The technology that allows for such systems will improve and become more precise in the future. The most important thing for investors remains to learn and study the markets.