Risk Management and You - MVHQ

Risk Management and You

Why protecting your capital is more important than ever

Jan 19, 2023
Risk Management and You

Even with the recent crypto strength and the possible resurgence of our favorite coins, it’s no secret we are still deep in a bear market. Just take a look at almost any crypto or tech stock over the past six months; it’s likely you’ll see it down over 20% from its high. While it may seem appealing to deploy capital now in hopes of catching the bottom of the bear or capitalizing on this newfound strength in crypto, this article serves to remind you, fellow trader, of the importance of risk management.


One of the most significant factors of success for professional traders is bankroll management. The ability to allocate an appropriate amount of risk to each trade allows a trader the ability to endure losses, compound gains, and, most importantly, live to trade another day. A general rule for newer traders is that a single trade shouldn’t take up more than 1% of your total bankroll. Managing a bankroll and, in turn, your own risk, will allow you to feel more confident in trading and avoid costly mistakes that will set back your account and mental health. 


I speak from experience on this topic. At the height of the bull run for NFTs, I had no concept of risk management. At one point, I had a portfolio worth upwards of 100eth and still had over 50eth deployed in NFTs (very illiquid assets). It’s no surprise that, when the bear cycle began, I had a hard time cutting losses as my portfolio took over a 30% hit. This event led me to the almost inevitable tilt cycle as I tried to take on larger and larger trades, trying to make back the money I lost as quickly as possible. 


The experience I mentioned above is not unique to me. In fact, most traders, at some point in their lives, will go through the trials and tribulations of blowing up an account and being forced to figure out, “Where do I go from here?” Well, I’ll tell you. If you want to get better at risk management, the true key to success is discipline. You’re probably thinking: “What a boring answer.” Honestly, you’re right! Discipline can be boring and tedious, requiring extra steps to trading, such as making trade plans, having pre-determined risk levels for trades, and thinking ahead about where to take profits and cut losses. However, the beautiful thing about risk management is that it is fully customizable to you. 


Say you’re the type of trader who wants the big swings, a go big or go broke mentality. I say, go for it! The purpose of risk management is not to take on any risk; it is to structure your risk better to give you more consistent results over time. A common mistake that new traders will make is that they will take any trade for any amount because, at the time, it seems like a good idea. Nothing wrong with that, but what happens when you don’t have a bankroll management system in place? Suddenly, you’re taking trades for 1% of your account, 4%, 10%, etc. What then happens when the trades you took for 1%, 4%, are successful, but the trade you took for 10% of your portfolio is a miss? You are left with over a 50% win rate, but are still not guaranteed to be a profitable trader. 


This is where risk management is critical. Personally, I like to structure my trades into different risk categories. I try to target around 1% of my bankroll for short-term intraday trades and will up that risk to about 3-5% on a multi-week to monthly timeline. Additionally, I structure trades along with my conviction. If I have absolute certainty in my trade, I might escalate my risk up to 5% even for a weekly position, but again – I do this with complete confidence in the moves that I’m making. Even when I think I can’t be wrong, I never risk it all.


This was a tendency that bit me multiple times during my NFT career. I remember vividly last year, during the peak of the bull run, there was a project called mutant cats that was on fire. The concept was that owning a mutant cat would give you access to a DAO where the sole purpose was to obtain CoolCats and hold them in its vault. They would then issue a token to give ownership over the vault. At the time, CoolCats were around 10eth, and mutant cats were quickly breaking the 1eth barrier. At the same time, a new project called zombie cats was released with the exact same concept as mutant cats. I thought it was an absolute no-brainer; with the same tokenomics, zombie cats would be cruising to 1eth in no time, and I would be sitting on an easy 10x. I quickly loaded 15% of my bankroll into zombie cats. Zombie cats were de-listed off Opensea the next day, and the rest was history.


Even when you are entirely convinced that a trade will work out, you need to practice risk management. There is never a sure thing when it comes to investing, and while big risk can lead to big reward, there is something to be said for the preservation of capital over time. 


While I still haven’t found the exact risk management style to use every day I trade, I have made significant progress over the past few months by more closely tracking my trades and doing my best to limit the trades that I’m less sure about to smaller position sizes. I hope this article gave you some thought to your risk management style and that you continue to fine-tune it during your career as a trader.