Due to my lack of pencil skills, readers will be required to utilize their imagination to see Cryptoboy. Hopefully the cat above will suffice.

[illustration 1 - Cryptoboy looking down from a cliff]

Preamble

6~ months.

That's how long it's been since I started to dabble in crypto. That's not very long, and I'm no coder either, but I am proud of the knowledge and and skill I have acquired trading forex markets. It's fascinating trying to read price and see how my knowledge of forex markets applies to crypto. It's a journey I am thoroughly enjoying.

Anyway, this is about risk. Not myself.

[illustration 2 - Cryptoboy falling]

...Amble?

It surprises me how little risk is discussed in the crypto scene. Sure, there are the usual statements waiving responsibility, but I've yet to come across a post or discussion exploring the deeper implications of risk.

You often see people say something along the lines of "Don't invest more than you can lose!" This is really good advice, but it deserves a deeper exploration.

[illustration 3 - Cryptoboy hits the ground]

Risk is something that must always be accepted. When you put something at risk you must accept there is a chance to lose it. Internalize it! Taking a loss should not devastate you. One of the most damaging effects of not truly accepting your risk, is that it cripples your ability to think clearly and rationally. You can only see things one way because, to seriously consider the possibility of taking a loss causes too much pain. If/when you are devastated by a loss, it serves as a long term injury effecting your judgement going forward.

[illustration 4 - Cryptoboy being aggressively loyal]

Spending any time reading crypto groups on reddit betrays an overwhelming sense of loyalty to a respective cryptocurrency. Why be loyal to a market? Do you think the market cares about you? The market couldn't care less! It's not your friend, nor your enemy.

There are two things happening that I would wager are the cause of this obscure loyalty.

1. The aforementioned risking more than you can accept to lose.
2. Believing you have gains before realizing them by liquidating.

Be loyal to your risk

[illustration 5 - millionaire cryptoboy with his forgotten pet dog RISK]

Take Joe. Joe didn't buy 2 pizzas like Laszlo did, and became a bitcoin millionaire. He doesn't want to liquidate his bitcoin because he'd rather not pay the taxes on them and besides, bitcoin's going to $10,000usd anyway right?

Dangerously, Joe has forgotten about his risk because he is so elated with his newfound fortune and he feels good about himself. Of course he can't seriously consider the possibility of a major bitcoin crash because the thought of losing the millions he believes he already has is just too painful.

[illustration 6 - millionaire Cryptoboy petting his dog RISK]

If Joe remembers to respect his risk, then he is still in control of himself and his emotions can't get the better of him. He could still face some pain, but not pain he was not prepared to face.

Fear not HODLers, this is merely an example of how unaccepted risk exposure effects judgement. I'm not saying bitcoin is going into the ground.

The meat

From where I sit, there are two kinds of crypto participants I'd like to focus this text on.

[illustration 7 - Investor Cryptoboy]

The Investors (HODL)

Investors are people (like many of us here I expect) who optimistically believe in the future blockchain technologies offer us. We'll buy into a bunch of ICO's hoping they deliver on their promises, and hold various currencies hoping that the world catches on and floods the market with the buy orders we can all ride to the moon.

OK, fair enough, there are probably a lot of sensible people here who understand that whatever you sink into your crypto portfolio is always at risk and if it all goes poof, sure, you'll be sad but it wont cripple your lifestyle too much.

Diversification is key here in order to mitigate risk. Diversification should also extend beyond your crypto portfolio. You know... just in case.

[illustration 8 - Trader Cryptoboy]

The Traders

Traders speculate on the market and decide to place buy or sell orders based on fundamental, technical, or mental analysis. You only need 3 things to do this.

An entry. A stop. A target.

When you decide to act on a trade idea and enter the market, that's your entry. If you do not place a stop order the market could empty your account. So place stop orders with every trade!

Picking a level for your stop defines your risk before you even enter the trade. You have to define your risk before you can decide if you can truly accept it. If that wasn't a good enough reason already to place your stop and you're saying "but I can just use a mental stop!", bear in mind it's a lot harder to pick a good level for your stop when you are already in the market because now you have all these new emotions affecting you.

Hopefully now you get it, place stops!

The most important reason for picking a target is so that you can game your probabilities. I'll expand on that in a bit. For now just consider that deciding before you enter the market where you will cash out and take your winnings, once again protects you from the difficulty of making these decisions in the heat of the moment.

[illustration 9 - wide eyed Cryptoboy]

Now it gets really cool.

If you are risking 50% of your capital on every stop, you can only afford to take 2 losers in a row before your account blows up. That's pretty crappy. I'd recommend 1%. That means you can afford 100 losers in a row before your capital is gone. That's some good protection for newbies learning the ropes. Once you have some stable history under your belt you could review your performance and consider increasing that to 2%.

Now, if you risk 1%, but you always look for 3% gains, that means you can actually be wrong 65~% of the time and still make profits! This is called Risk vs Reward. I'm sure many of you have heard of it.

This is pretty crazy. You can be wrong most of the time and still bank profits. This is possible when you can respect your risk, manage your emotions effectively, and stick with your strategy for the long haul.

The Wrap

Keep your eyes on the bigger picture and don't get hung up on one trade here or there. Control your risk and game the probabilities of your trading. And remember, if you are risking too much then most of the time your account will blow up before you can realize any profits.

Risk management is a cornerstone of any successful person, in any field. Respect it.

[illustration 10 - Cryptoboy standing on the backs of two risk dogs riding to the moon]