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Risk management
Risk management
Cryptocurrency
07.09.2021
Updated 18.11.2021
14:26

The main rule in life is to be able to manage risks!

A guide for novices. 

In our real life, we always manage the risks, be it car driving, insurance of life or property, or during the treatment process. All of that comes down to a simple rule: it’s vital to be able to manage risks and react to them in time.

Quite often, when doing everyday tasks, we manage them unconsciously. But there are areas where risk evaluation is an important and integral part of it: financial markets and management of your business.

Talking about economics, everything resolves into specific rules that companies or investors must follow strictly to process financial risks. Actually, this is inherent to all types of business.

If we’re talking about investors and traders, an asset management system includes several types of assets: stocks, cryptocurrencies, indices, Forex, and real estate.

Risks are classified differently. In this article, we’re talking about it.

Let’s consider the process of risk management and review some strategies to find out how risks can be reduced.

How does risk management work? 

There are five steps.

To do this, you need to:

  1. define the objects of risk;
  2. define the risks themselves;
  3. evaluate them;
  4. develop a strategy;
  5. observe them.

Due to the fact the situations differ, the steps may alter as well.

Defining the objects of risk

That is the first step in our article, and it means that you need to define the main goals. As a rule, they (goals) relate to the risk of a company or person. To put it simply, it means that you should define what risks you are ready to face to reach your goals.

Defining risks

It is the second step. During this stage, it’s vital to detect and define potential risks. The purpose of this action is to enumerate all possible events that may have a negative impact. If we are talking about business, we should also include deep analysis that is not connected to financial risks.

Risk evaluation

That is the next step, and during it, you should evaluate how often the risks may occur and how powerful their impact may be. Risks are ranked according to their importance, which defines the appropriate countermeasures.

Developing a strategy

It is the fourth step in which you need to react to every type of risk, depending on its importance. At this stage, measures required in case of market realization are being taken.

Observation 

It is the fifth step in the risk management strategy. And it’s essential to track the efficiency and react to events. In doing so, it’s often required to continuously collect and analyze the data.

Management of financial risks.

here are many reasons when the strategy or chosen trading adjustments may be unsuccessful.

For instance:

Many members of financial markets will agree that if you have a correct strategy, it significantly increases the chances of investment and success. In practice, it all looks not so difficult; all you need is to simply set Take-Profit or Stop-Loss.

The right and reliable strategy provides you with a clear range of possible steps, which allows a trader to prepare for all situations that may occur.

As we have said before, there are a lot of ways to manage risks. The best option would be to always review and adapt to the market.

Here are some examples of financial risks and how to mitigate them.

Market risk

Setting a Stop-Loss order during each deal can reduce the market risk. Thus, positions will automatically close before they cause significant losses.

Liquidity risk

If you trade on the market with high liquidity, the risk may reduce since the higher capitalization of assets is, the higher liquidity will be.
This type of risk reduces through trading on reliable exchanges. Due to this, borrowers and creditors (buyers and sellers) may not worry about the good faith of each other.

Operational risk

Investors can reduce it through portfolio diversification; it allows them to reduce possible negative consequences from a company’s activity or project. Also, during this process, you may analyze the market and find companies less susceptible to disruptions.

Systematic risk 

It may be reduced through portfolio diversification. But in this case, there must be projects with various products or must be companies with areas that don’t intersect. Especially, pay attention to their low correlation.

Conclusion

Let’s sum it up. Before opening a position and allocating some capital, investors and traders should work on risk management. Also, it’s vital to understand that financial risks cannot be fully excluded.

To manage risks doesn’t only mean to reduce them. It also implies the presence of strategic thinking, which allows using inevitable risks in an efficient way.

Telling simply, to manage risks means to be able to define, evaluate and track them, according to the strategy and context. And as you understand it is required to determine the most beneficial ones.