How To Evaluate Risk When Trading

Share and Comment

Trading stocks or cryptocurrencies is always a risk. Even though you can make some good profits, there is always a chance that you will lose money too. However, if you are able to manage risk properly, you can reduce those losses and make sure that your money grows.

The most successful investors are the ones that understand how to assess a stock or a cryptocurrency and calculate the risk, so they can make informed decisions about their portfolio. There are a number of metrics to measure and if you don’t already know how to calculate risk, read on to learn more.

Multi Time Frame Analysis

Checking the value of an asset over time is the easiest way to measure the risk. If a stock or a cryptocurrency generally increases in value over time, it’s likely a good long-term investment. However, people often make the mistake of analyzing a very small time frame and making decisions based on that information alone. But what if recent increases in value are an anomaly and overall, the performance of that asset is bad? That’s why you need to do a multi time frame analysis. Take the example of the cryptocurrency dogecoin, for example. When it first emerged, it was the subject of a popular online meme campaign and the value skyrocketed. But if you look at the price of dogecoin today, you’ll see that it has leveled out since then. It can still be a good investment, but don’t expect it to reach the same high that it did before. You always need to do a multi time frame analysis so you can see the long and short-term performance and make more accurate predictions.

Outside Factors

Outside factors have a massive impact on the value of financial assets. If you are investing in stocks, for example, you need to follow the company closely. Are they about to release a new product? Will it perform well, or will it be a flop? If you suspect a company is about to make a poor business decision, it may be time to cash out your investment while you’re still running at a profit.

The same is true of cryptocurrency. New coins are being released all of the time, offering more efficient transactions or applications for specific industries. If a new coin is released that will replace one that you are heavily invested in, you need to cash out before the value dips. Make sure you research all new cryptocurrencies before investing.

The One Percent Rule

Diversifying your portfolio is crucial when managing risk. If you put everything into a single trade and it goes bad, you’ll lose it all. But if you spread your investments out, you can offset losses in some areas with gains in others. The one percent rule is a basic way to make sure that you are always limiting risk, and it’s very simple; never put more than one percent of your total capital into a single trade. This avoids situations where you take big gambles on specific stocks or cryptocurrencies that may not be as successful as you think.

Follow these basic principles and you can measure and manage risk when investing.

Share and Comment