Most investors think of limiting risk as an obvious thing that they need to do when investing into the crypto market:

“Research the tokenomics to limit your risk”

“This is a good team, they have built a solid product, my downside risk is protected”

What if I told you that over the last 4 years of investing in crypto, I’ve realized these traditional sayings are wrong.

The best projects can carry a lot of risk regardless of their perfect tokenomics or product fundamentals. To truly understand the risk at the moment of investment, we need to look at the chart and contextualize our buy point with other risk metrics.

Risk Management is the Gateway to Huge Gains

Risk management is hard because it all has to be done in real time, today. You make a decision now and hindsight is worth nothing except additional learning for future scenarios. So how do we manage risk?

1. Buy at the right pivot point

2. Cut losses between 5% to 10% at the maximum

3. Only buy the highest quality tokens that meet select criteria

Buying The Perfect Pivot

The past few posts have talked about this perfect pivot buy point and some familiar pattens you can use to identify the perfect buy point. Cup and handles and double bottoms will be your key areas to look for when buying a good crypto.

But along side these two famous chart setups, which happen quite often, we can also use some famous moving averages to help us identify key areas of confluence where risk gets easy to limit.

On a daily chart, it is recommended to use the:

• 21 day simple moving average

• 50 day simple moving average

• 150 day simple moving average (not always as necessary)

• 200 day simple moving average

On a weekly chart it is recommended to use the:

• 10 week simple moving average

• 30 week simple moving average

• 40 week simple moving average

In the below image, we have a great pivot buy point at the white circle, and downside risk protection at the pivot buy point of about $104,000, the 21 day SMA at $104,500, and the 50 day SMA at $100,000.

Combining the pivot point with moving averages can give us a couple of levels of support that we can stack to limit downside risk. This also gives us key areas where we can cut a loss and say that it broke our support level. If a breakout of the pivot reverses on us, we can use the pivot buy point as a place to trim losses.

If the crypto we bough falls further down to the 21 or 50 day moving averages, we can use those levels as further support for when to cut a loss and reduce risk.

For example, lets say you bought the below crypto, BODEGA, at the pivot breakout of 0.358 ADA. Your risk could be limited by saying that you will sell if the price drops below the 21 day SMA at about 8-9% below your purchase price.

You could also say that you will sell if price fails to hold the pivot breakout of about 0.35 ADA. These two levels allow you to risk about 10% or less, which is manageable given the upside potential.

Limiting Losses to 5% to 10%

A famous trader named Mark Minervini did an analysis on their trading habits over their first few years trading and the results were shocking. If they simply limited their maximum loss taken during their trading year to 10%, they would have made over 70% profit instead of taking an 12% loss.

So going from having no maximum sell rule to defining one of 10% took a losing year to an incredibly positive gain year. This shows how important limiting losses over 10% is because they exponentially work against you.

What I am trying to say, is that you should limit all losing positions to a maximum of 10%.

If you buy a crypto, and it drops more than 10%, then you bought it at the wrong pivot time. You should sell out of the crypto, let it reset, and wait for a more ideal time to buy.

This will not only limit your risk, but protect your precious capital, which I know we all have disregarded a time or two.

Buy The Highest Quality Tokens

In the stock market, we have metrics like relative strength, earnings per share, revenue, and many other numbers we can use to filter the good stocks from the bad. Crypto is a little different.

With crypto, we can filter out good projects from bad projects by filtering them by their chart action, their tokenomics, their fundamental use case, the delivery of their product, and their subcategory within the crypto world.

This part is a little tricky because it comes down to personal interpretation, but you want to try to align your portfolio with cryptos that are leading the pack. For example, we have definitely had times when memecoins were leading, other times when NFTs were leading, and other times when defi was leading.

1. Pick the projects in the right sector or blockchain ecosystem

2. Pick projects with the best tokenomics and token utility

3. Pick projects with the best use case and product delivery

4. Pick projects that have good charts and investors seem to rally around

The most important part of limiting your risk is identifying the proper buy point with good support below it or ideal places to limit your losses to 10%. If you can do this, you will be a much better crypto investor than you are today.

After you understand this, you can start to understand crypto market sectors, fundamentals, tokenomics, and how all that plays into a project that leads the pack.

Limit your risk. Make more profit. Have less stress.

Also, a final note to this post, is that if you are willing to risk 8% on a trade, then you need to try to make 16-24% in return at a minimum.

Lets say that price on ADA is breaking out of a cup and handle and starts to turn around. You have the 21 day SMA below the pivot at 5% loss as a good target to cut the position. If you’re willing to lose 5%, you must make 10-15% return on the upside at the minimum to make your risk worth it.

Investing and trading is all about risk reward under specific scenarios. Hopefully this post shines light on how you can limit risk and make more money all in a shorter time period.

Thanks,

Dawson