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One major reason why traders lose money in cryptocurrency trading today is that they are too eager to buy cryptocurrency without carrying out proper research on the coin they wish to buy. Many today seem so convinced that the price will rise from their entry that they neglect to apply proper risk management strategy to guard their positions should the market go contrary to their predictions. The prices of various Cryptocurrencies are very volatile and could go either up or down depending on the prevalent market conditions. Cutting losses often save the trader from losing his entire capital whenever the market moves rapidly in the opposite direction to his position in the market. 

We have therefore discussed in this work the basis of handling losses in Cryptocurrency trading to guide traders in protecting the capital while taking positions in the market. 

What is cryptocurrency trading?

Cryptocurrency trading involves buying Bitcoin or any other digital asset (altcoins) while their prices are low, in the hope of selling them when their values appreciate in the future. The purpose of cryptocurrency trading is to get a higher value for one’s capital. Thus, a trader who buys Bitcoin with an initial capital of $30,000 when the price of Bitcoin is still at $15K might look forward to selling them when the price rises to $30K in the future. By this, he would have made 100% of his invested capital. However, there is no guarantee that the price of any given cryptocurrency will get to any level in the future. Traders only speculate on the possible price target while taking positions in the market. 

How to trade Cryptocurrency today

When it comes to cryptocurrency trading, traders are usually faced with the option of choosing between Spot trading and CFD trading. Trading cryptocurrency using the Spot method allows the trader to possess the purchased digital assets. This means he can transfer it from one wallet address to another till he decides to sell them. While trading Cryptocurrency as CFDs gives the trader the advantage of using leverage while taking positions in the market. This form of trading bears so much risk as there is no ownership of assets traded.  

How to handle losses in Cryptocurrency trading 

There are four important practices used in handling losses in Cryptocurrency trading today. We have discussed the following:

  • Setting stop loss: Stop loss is an important trading strategy used in limiting losses in cases of rapid market volatility against the trader’s position. The stop-loss order closes the trader’s position when the market goes against him up to the limit he has placed as his stop loss. This prevents him from losing so much due to strong market volatility.  
  • Placing a take profit target: Often, the price of a given cryptocurrency could spike to high levels before dumping again. Setting a take-profit target helps to close the trader’s position at higher levels whenever there is a sudden spike in the market. 
  • Hedging: Hedging involves taking two different positions in the market. The practice of hedging stems from the fact that the market can either go up or down. Therefore, a trader could hedge a particular cryptocurrency he purchased by placing a sell order as CFD using a “sell limit order”  below his initial entry for that same crypto purchased. This means his order will trigger whenever the market decides to go in the opposite direction to his first position. 
  • Diversifying one’s portfolio: Investing in different Cryptocurrencies helps the trader to limit losses. Thus, he stands to benefit from any of the different coins purchased when a particular one fails.