How to Determine Your Risk Tolerance When Trading Crypto
Risk tolerance is a term that often floats around the crypto community but is rarely discussed in detail. Although many traders have an idea of what risk tolerance is, only some have chosen to determine their own risk tolerance and incorporate it into their trading strategy. Once you fully understand this concept, you can pave your way to success when trading and learn how to make informed trading decisions based on your goals. By assessing your risk tolerance, you can start fitting your investment strategy within that tolerance, helping you to avoid regrettable investment decisions that can result in financial ruin.
After you have determined your risk tolerance, it’s time to start (or continue) your trading journey. Of course, nothing’s stopping you from diving straight in and beginning to invest in various coins. However, if you want extra guidance when trading so you can make informed investment decisions, then we highly recommend seeking the help of a crypto platform.
The role of a crypto platform is to connect users with experienced brokers. These brokers are assigned to each user based on their location, experience level, and trading preferences. Once you’ve been assigned a broker, you can discuss your risk tolerance, and they will offer any tools and resources you might need. If you’re struggling to find a suitable crypto platform, then we recommend Bitcoin Up. As stated on its website, “Bitcoin Up is an automated system that connects users with crypto trading brokers who offer advanced trading software. With this software, you can potentially trade stocks, forex, commodities like silver, gold and oil, currency pairs like USD/EUR, cryptocurrencies, and much more.”
Risk Tolerance vs Risk Capacity
Traders often get confused about the difference between risk tolerance and risk capacity, but it’s important to distinguish between the two terms. Whilst risk tolerance is based on how much risk you’re willing to take; risk capacity is based on how much risk you’re able to take. A trader’s risk capacity can change at any time as it largely depends on their financial situation.
For example, if you’re in a stable job that pays well and have a good amount of savings tucked away, your risk capacity is likely quite high. On the other hand, if you’ve just lost a job, have debts to pay off, or need to attend to other large financial obligations, then you’ll typically have a much lower risk capacity. It’s important to establish your risk capacity and risk tolerance, as you don’t want to end up investing funds you can’t afford to lose. Trading cryptocurrency is an extremely high-risk activity, and with such a volatile market, traders can lose their assets at any time, so it’s vital not to invest over your risk capacity.
Factors That Affect Your Risk Tolerance
Here are some factors that affect your risk tolerance when trading crypto. Please keep in mind that these factors affect every trader differently, and there are no set ‘rules’ when it comes to risk tolerance.
Generally speaking, your age can influence your trading risk tolerance. A trader who is 35 years old or younger will typically be able to take more risks than some older than 50 years old. Although, this affects everyone differently. Some older traders may have built up a large amount of savings and have fewer finical responsibilities, so they will have a higher risk tolerance than someone in their 30s who may have a family to support and don’t have as much additional income to dedicate to trading.
Beginners traders may try to jump into the crypto market and start investing the same way experienced investors do. But your experience level is another factor that can influence your risk tolerance. If you’ve never traded crypto or other assets before, then it’s not recommended that you begin with high-risk investments. Instead, you’re better off starting with smaller investments until you gain a better understanding of how the crypto market works. More experienced traders will often have a higher risk tolerance since they’ve built up market knowledge and are generally more likely to make well-informed investment decisions.
Your financial timeline refers to your own financial goals outside of trading. If you are saving up for a large purchase, such as a house, or you have student loans to pay off, you may have a lower risk tolerance compared to other traders. Your financial timeline will often and sometimes suddenly change, so it’s important to always keep it in mind when determining your risk tolerance.
How to Determine Your Risk Tolerance
The key to determining your risk tolerance is learning how to balance it alongside your trading goals. To do this, you first have to establish what your short-term and long-term goals are. This is easier said than done, of course, but it is a vital part of investing in crypto safely and will play a key part in your trading strategy. Ensure that your goals are attainable and then think about how they would affect your risk tolerance. If you want to make a sizable long-term profit, then perhaps high-risk investments are your best option. On the other hand, if you want to prioritise short-term goals, then low-risk investments may be the best bet.
It’s also a good idea to bear risk tolerance in mind when comparing yourself to others. Traders can sometimes get caught up in what others are doing, leading to the fear of missing out. However, you should remember that every trader has a different risk tolerance, which will influence how much they are willing to invest in crypto. So, just because another trader is making large and high-risk investments, it doesn’t mean that you should be doing the same.
To conclude, assessing your risk tolerance is a key aspect of starting off your trading journey. Risk tolerances and personal trading goals go hand in hand, and both can help traders form a profitable trading strategy. Your risk tolerance can b influenced by numerous factors, with the main ones being your age, trading experience level, and financial timeline. By taking time to consider your risk tolerance, you’ll have a much better understanding of how to find personal success when trading cryptocurrency!
*This article has been paid. The Cryptonomist didn’t write the article nor has tested the platform.