You're doing it wrong: Risk Management In Crypto Trading

There's a couple of parts to it. There's catastrophic risk and there's system risk, and then there's position risk. So catastrophic risk, you can't deny that the regulation in this space is evolving.

Rapidly, if I can get my words right. And so what you can trade in one country from one week to the next, one month to the next, can change. And also the future of particular tokens or parts of the market can change over time. So you want to be really cognizant that you might need to be nimble with your, your strategy, your portfolio, and get out if the market turns down.

There's also, you know, this is an immature market, so there's a lot of market shock potential. You know, we've seen some very sudden declines. And so, you know, you want to think pretty carefully about your risk profile and your catastrophic risk tolerance. You know, for me, if I think about my whole portfolio.

You know, no matter what happens, any conceivable event that I can dream up, I want to be able to trade the next day and still support my family. That's kind of, that's my threshold of what catastrophic risk I'm willing to tolerate. Now, what that means is when I think about something like crypto, I'm not putting all of my assets in that, however tempting it is, how amazing the returns are on the systems I'm developing. They're just a part of the portfolio. And I think that's important because people see the dollar signs and just go all in. And particularly a new trader with very little experience, that's really dangerous. Then you combine that with the 10, 50 times leverage that the exchanges seem to want to give you, and instantly people are just blowing up. So catastrophic risk is huge. You also want to think about the exchange risk. So I wouldn't put all my, all my money on one exchange. I am trading actively, so I can't use cold storage because I'm in and out of the positions fairly quickly. And it's sort of a bit cumbersome. But in order to protect myself a little bit there, what I'm doing is I'm using multiple exchanges. On the exchanges that offer leverage, I'm putting my, some of my assets on there and using leverage and keeping some of the cash separate, off the market, out of the market. So that's the catastrophic risk protection. The second part of the risk management is the systematic risk, the risk of your systems failing. And this is, this is important because the market's evolving rapidly and we're seeing new.

Participants entering. You know, there's ETFs coming and there's, there's broader and broader acceptance. And so the nature of this market may change over time. Well, it will change how quickly when, you know, we didn't yet to be seen. But you want to know that you have a broad portfolio of systems so that if one of them fails, you can close it and keep trading with the others and monitor those pretty closely. So back testing weekly and evaluating. Okay, are the stats doing what they're supposed to be doing? Is this behaving as I think it should, given the market conditions? I'm not trading one system. You know, this morning I ran six and I'm developing new systems all the time. And so my goal is to keep building that portfolio of trading strategies so that, you know, when one fails because the market dynamics shift a little bit, it doesn't actually matter that much. And then the last one is the individual position risk. You just can't afford in this market to get married or fall in love with one position. You know, people talk about, oh, this is going to change the world and this token is going to, you know, revolutionize everything. And maybe it will. But trying to call it now is like going back to when the automobile was first invented and saying that it was going to be Ford and General Motors that survived. I mean, who knew? No one knew. But there was hundreds and hundreds of car companies. And the same again with aircraft, you know, when the aerospace industry kind of took off, same thing, hundreds of massive proliferation of people trying to crack it and change the world. And then same again with the dot com, and most of those aren't here now either. So the same, and probably more so in the crypto space is we just don't know which ones are going to succeed. And so if you buy one and heavily concentrate your portfolio with a couple of tokens and they happen to be the ones that trade the world, that change the world, you know, congratulations, you're probably going to be a billionaire. But you've got to think, what if I don't? What if I don't pick the right ones? What if the five that I pick are the duds and I end up with nothing? My approach to trading is I want maximum probability of a certain outcome, not maximum profit potential. A small probability. Yeah, I'm much more interested in a degree of certainty about what results I get. So therefore, a portfolio of systems trading a portfolio of instruments with a very low reliance on any one ticker is what gets you there.

Sam.