Trading and Investment Strategies

Key Focus on Learning Cryptocurrency Basics

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Cryptocurrency Basics—

Trading and Investment Strategies

What is Margin Trading?

Margin trading involves using third-party funds for transactions. Regardless of profit or loss, this method amplifies the results. Margin trading increases the opportunity for traders to use capital while reducing counterparty risk. Why is that? It's because, in trading equal position sizes, traders can decrease the amount of funds deposited on a cryptocurrency trading platform.

In margin trading, you often hear two key terms: margin and leverage. Margin is the total amount of funds you invest (personal investment), while leverage refers to how much you amplify the margin amount. For example, setting leverage at 2x means the opened position is double the margin. Using a 4x leverage ratio means the opened position is four times the margin, and so forth.

However, one must always be wary of forced liquidation. The higher the chosen leverage, the closer the forced liquidation price is to the entry price. If faced with liquidation, you risk losing all your margin. Therefore, understanding the significant risks of margin trading is crucial before embarking on trading.

What are Trading Strategies?

Trading strategies refer to the plans you follow when executing trades. There is no one-size-fits-all approach to trading, as each strategy largely depends on the trader's personality and preferences.

Regardless of the trading approach, having a well-defined plan is crucial. Setting trading goals in the plan helps avoid irrational actions driven by negative emotions. You typically need to decide on the content of the trade, the trading method, and the buying and selling prices.

What is Portfolio Management?

Portfolio management is the way of creating and handling a series of investments. A portfolio itself consists of asset groupings, which may involve various asset types, from collectibles to real estate. If exclusively trading cryptocurrencies, a portfolio may consist of Bitcoin along with other cryptocurrencies or tokens.

Before engaging in portfolio management, you should first consider your expectations for portfolio returns. Do you want the portfolio to be shielded from asset volatility, or are you seeking a higher-risk product that may bring substantial returns in the short term?

What is Risk Management?

Risk management is crucial for trading success. First, you need to understand the types of risks you might encounter:

1. Market Risk: Potential losses incurred when assets depreciate.

2. Liquidity Risk: Potential losses in markets lacking liquidity, where investors may struggle to find buyers for their assets.

3. Operational Risk: Potential losses due to operational errors, which can result from human error, software/hardware failures, or intentional fraudulent activities by employees.

4. Systemic Risk: Potential losses due to poorly managed peer operations, causing potential losses that ultimately affect all businesses in an industry. The 2008 financial crisis is a typical example, where the collapse of Lehman Brothers led to a chain reaction affecting the entire global financial system.

Risk identification involves recognizing assets within the portfolio, considering both internal and external factors. Next, you assess these risks—how often do they occur, and what is their severity?

By balancing risks and assessing their impact on the portfolio, you can prioritize risks and formulate corresponding strategies. For example, diversifying investments can mitigate systemic risk, and using stop-loss orders can reduce market risk.

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