Automated trading has made it easier for people to invest in cryptocurrency because it involves using software that makes transactions for them. In this article, we will look at various risk management techniques for automated cryptocurrency trading that are implemented in the SMARD software.
What is risk management?
Risk management is the process of identifying, assessing, and controlling potential risks that may arise in any given situation. In the context of trading, risk management involves identifying potential risks that may arise from transactions and implementing strategies to mitigate those risks. This makes trading more profitable and improves the profit-to-risk ratio.
Automated cryptocurrency trading and risk
Automated cryptocurrency trading involves the use of sophisticated algorithms and tools that automatically execute trades based on predefined criteria. While this approach has a number of advantages, it is not without risk. The volatile nature of the cryptocurrency market means that the risk of losing funds is higher, and more attention needs to be paid to qualitative evaluation.
Momentum effect in cryptocurrency trading
The SMARD algorithm is a powerful tool for investors looking to make profitable trades in the cryptocurrency market. It is based on the quantitative momentum investing philosophy popularized by Eugene Fama, the Nobel laureate in economics. This phenomenon, where assets that have performed well in the recent past tend to continue to perform well in the near future, allows SMARD to identify potential market winners and generate higher returns than traditional buy-and-hold strategies. By analyzing trends in asset prices and identifying those with momentum, SMARD can help investors make trades that are more likely to generate higher returns.
Volatility Analysis
Volatility is a crucial factor to consider when assessing an asset for trading in financial markets. It helps us gauge the risks and potential returns associated with a specific asset. In highly volatile markets with significant price fluctuations, there are often greater opportunities for profit.
How do we use the knowledge of instrument volatility?
- We do not trade instruments with low intraday volatility. No risk — no profit!
- We decide to reduce the risk on an instrument with excessively high intraday volatility. We ensure the stability of trading and results through our own risk control algorithms.
- Based on our knowledge of benchmark volatility, we can see price consolidation trends. In such scenarios, we prefer to refrain from trading to reduce commission losses.
Based on our analysis of volatility, SMARD selects the most attractive assets for the highest returns with the least risk.
Coin Capitalization
Why is market capitalization of coins important for trading strategies?
The primary reason for this consideration is its impact on liquidity. Liquidity is essential for choosing instruments with a consistent presence of buyers and sellers. High liquidity guarantees that we can execute trades at optimal prices and timings. To minimize risk for our clients, SMARD avoids trading low liquidity assets, focusing instead on the Top-50 coins for Binance Spot and Top-40 derivatives for Binance Futures.
What is the reason for this choice?
- Trading assets with higher market capitalizations provide us with a sufficient level of stability and predictability that may not exist in smaller, more volatile assets.
- According to large-scale backtesting, it is this set of assets that shows the best returns at a low level of risk.
Stop-Losses, Trailing Stop and their combination
Stop-losses are the most important tool for risk management in trading. Depending on market conditions, SMARD uses regular stop-losses, trailing stops or a combination of both.
Conventional stop-losses are a set price point at which assets are sold if they fall below it. It’s a simple and effective way to manage risk and prevent large losses. However, in a volatile market, a regular stop loss can be ineffective because the price can quickly fall below the stop loss level.
In such circumstances, investors may use a trailing stop. A trailing stop is a stop-loss order that dynamically adjusts itself based on the price movement of an asset. For example, SMARD can set a trailing stop at 10% below the current market price. If the price rises, the trailing stop also rises, and if the price falls, the trailing stop remains the same or falls. This allows SMARD to lock in profits while limiting downside risk.
Conclusion
In conclusion, risk management is crucial when trading cryptocurrencies, especially in automated trading. You should choose software that manages risk responsibly and does not chase the number of trades by taking unnecessary risks on your clients.
To see SMARDs trading results and explore the functionality of the software, follow this link.
FAQs
What is automated cryptocurrency trading?
Automated cryptocurrency trading involves the use of software and advanced tools to automatically make trades based on predefined criteria.
Why is risk management important in cryptocurrency trading?
Risk management is important in cryptocurrency trading because the volatile nature of the cryptocurrency market means that traders can lose their investments if they do not implement risk management strategies.
What is a strategy based on the momentum effect?
A momentum effect strategy is a trading strategy that involves buying assets showing upward price trends and selling assets showing downward price trends.
How can traders use coin capitalization in cryptocurrency trading?
Traders can use coin capitalization to determine cryptocurrency liquidity and make informed buying, selling or holding decisions.
What are Stop-Losses, Trailing Stops, and their Combination?
Stop-Losses are tools used in trading to manage risk. They are set price points at which assets are sold if they fall below it. Trailing Stops are a type of Stop-Loss order that dynamically adjusts itself based on the price movement of an asset. A Combination of both can be used in trading, depending on market conditions.
