Welcome everyone to probably one of the most important articles you’ll read today. As we all know NFT trading is very volatile. With this volatility comes two things. Big wins, and big losses. Now we love the wins but how can we mitigate the portfolio recking losses? Enter risk management.
Now before we hop into the meat of the article it's important to know that a lot of what I’ll go over here is actually referencing a lot of “common sense” from very smart day traders (stonks). NFTs are fairly new however the day traders in stocks have been weathered through years of experience. These years have given them very valuable knowledge on how to take hits (losses) without getting struck out. Without further ado, let's get right into it.
The first and most important rule is to know your exits.
- When you enter a trade or buy an NFT INSTANTLY write out what your “stop-loss” will be and what your taking profit number will be.
The reasoning behind this is that it stops you from a) taking massive losses and b) it allows you to lock in profits that you are happy with.
The most common stop-loss percentage in stocks is 15% however with NFTs being much more volatile I'm more comfortable with using ~20% (that being said always assume your own risk tolerance). This being said it is VERY hard to stick to your stoploss but always remember the plan you went in with.
The second rule is to own up to your losses.
- Accept responsibility for what went wrong.
There is no worse feeling than going big or small into a play and watching your position massively decrease in value. The normal reaction is to try to blame the “market” but in reality, it is always better to own the mistake.
This allows you to improve. Writing down your mistakes and reflecting on them is crucial to becoming a better you and a better trader.
The third rule is to take losses gracefully.
- After taking a loss take a break.
After we lose a lot or even a little of our money in a trade we tend to feel very emotional. This can lead to revenge trading which can lead to even bigger losses.
The typical saying “every loss is a lesson” rings very true here. Write down what went wrong. Reflect on the moves you made. And only return to the tables once you are in a clear and focussed state of mind.
The second last rule is to be aware of your position.
- Know your position and play to it.
There are many many times where people have been overinvested and lost a ton of $$$. That being said positions are dynamic. It is generally accepted that you should NEVER allocate large %s of your portfolio into a play. In fact, the commonly accepted position size in the market is 1%. Now even to me, this is really low and I'm more comfortable with 5% give or take depending on my conviction.
The whole point of being smart with position sizing is to be able to take a large number of losses while still keeping most of your portfolio. Lastly, after taking losses it's important to lower your position sizings into projects to be safer.
The last and final rule is to embrace the process.
- Let go of outcomes and emotions, embrace the process.
Sometimes we get loss after loss after loss. It can be quite damaging and will most definitely damage your mental. But, it’s key to remember that every single loss makes you a better trader/investor. Acknowledge the mistake, learn what you actually did wrong, document it, and move on. Remember your goal in life/ this space and continually work towards it. Lastly trading with emotion tends to make us act very irrational. Stick to facts, and numbers, not feelings.
In closing, all of this is my personal opinion but I think it is important for people to see other people’s strategies/ techniques in the space, especially in times like this.
Good luck out there, let’s get some ETH! (follow for more!)