Risk Management in Investment

In this article of Quantvan, we are going to learn about Risk Management and some useful information that every investor or trader needs to know.

Risk management

It is a critical component of any trader’s overall strategy.

Risk management and position sizing are important aspects of cryptocurrency trading and investing

Position sizing: The size of one’s buy or sell, or more generally total position in an asset or asset class, relative to their bankroll.

Risk: refers to the probability of a negative event happening in your activities; an event that goes contrary to your intended outcome. Risk is part and parcel of the cryptocurrency trade. It is the chance of an undesired outcome on the trade, which translates to making losses.

Types of Risk:

here are some of the main financial risk in the crypto trading world:

Credit Risk

This risk affects crypto projects. It is the probability of the parties behind the crypto project failing to fulfill their due obligations. the Usage of Credit risk is mostly for theft and fraud in the crypto market. A good example is the hacking of Binance in 2018, which led to over $40 million loss.

Legal Risk

Legal risk refers to the probability of a negative event occurring for regulatory rules. For instance, a ban on cryptocurrency trading in a specific country. A practical example of legal risk is when the states of Texas and North Carolina issued a cease-and-desist order to Bitconnect cryptocurrency exchange due to suspicion of fraud.

Liquidity Risk

Liquidity risk in respect to crypto trading refers to the chance of a trader being unable or incapacitated to convert their entire position to fiat currencies (USD, YEN, Euro, …) that they can use in their every-day spending.

Market Risk

Market risk refers to the chance of coin prices moving up or down contrary to your desire in an open position.

Operational Risk

Operational risk is the chance that a trader is unable to trade, deposit, or even withdraw money in their crypto wallets.

Statistically, the larger your bid size, the more potential risk / potential reward per position. The reward is nice, but to ensure rewards over time it is vital to limit risk in the short term.


Main Risk Management Strategies

The rule of thumb in crypto trading is: “Do not risk more than you can afford to lose.” Risk management strategies can be broadly categorized into three: risk/reward ratio, position-sizing, and stop-loss & take profits.

  1. Position Sizing

Position sizing dictates how many coins or tokens of cryptocurrency a trader is willing to buy. The probability of realizing great profits in crypto trading tempts traders to invest 30%, 50% or even 100% of their trading capital. However, this is a disruptive move that puts you at serious financial risks. The golden rule is: never put all your eggs in one basket. Below, you can read one of the several possible ways to achieve position sizing.

Enter Amount vs Risk Amount

This approach considers two different amounts. The first involves money you are willing to invest in every single deal. The second involves money at risk, i.e. the money that you stand to lose in case the trading fails.

  1. Risk/Reward Ratio

The risk/reward ratio compares the actual level of risk with the potential returns. In trading, the riskier a position, the more profitable it can get. Understanding the risk /reward ratio enables you to know when to enter a trade and when it is unprofitable. below is the mathematical way of calculating this metric:

R = (Target Price – Entry Price) / (Entry Price – Stop Loss)

  1. Stop Loss + Take Profit

Stop Loss refers to an executable order which closes an open position when a price decreases to a specific barrier. Take Profit, on the other hand, is an executable order that liquidates open orders when the prices rise to a certain level. Both are good approaches to managing risk.

Stop Losses save you from trading in unprofitable deals while Take Profits let you get out of the trade before the market can turn against you.

You can make use of Trailing Stop Losses and Take Profits which follow the rate’s changes automatically. Although Such a feature isn’t available at the majority of crypto exchanges, you can set your Trailing Stop Losses and Take Profits right from the terminal.

Value at Risk (VaR)

Value at Risk (VaR) is a statistic that measures and quantifies the level of financial risk within a firm, portfolio, or position over a specific time frame. This metric is most commonly used by investment and commercial banks to determine the extent and occurrence ratio of potential losses in their institutional portfolios.

Risk managers use VaR to measure and control the level of risk exposure. One can apply VaR calculations to specific positions or whole portfolios or to measure firm-wide risk exposure.

VaR is calculated by shifting historical returns from worst to best with the assumption that returns will be repeated, especially where it concerns risk.

How Risk Control Works

Modern businesses face a diverse collection of obstacles, competitors, and potential dangers. Risk control is a plan-based business strategy that aims to identify, assess, and prepare for any dangers, hazards, and other potentials for disaster, that may interfere with an organization’s operations and objectives. The core concepts of risk control include:

  • Avoidance is the best method of loss control.
  • Loss prevention accepts a risk but attempts to minimize the loss rather than eliminate it.
  • Loss reduction accepts the risk and seeks to limit losses when a threat occurs.
  • Diversification allocates business resources for creating multiple lines of business offering a variety of products or services in different industries. A significant revenue loss from one line will not result in irreparable harm to the company’s bottom line.


you can click here for further information.