20 Ironclad Rules to Reduce Trading Risks

2024.09.12

20 Ironclad Rules to Reduce Trading Risks

If you don't actively manage risk, the market will do it for you.

2024.09.12 - 02:59:50

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Navigating Web3 tides with focused insights

If you don't actively manage risk, the market will do it for you.

Author: Edgy - The DeFi Edge

Translation: TechFlow

In the world of cryptocurrency, risk management is the most important skill.

If you don't actively manage your risks, the market will do it for you.

Here are 20 smart rules that can help you reduce risks and increase profits:

1. Rotate Quickly

Market narratives and sentiment shift extremely fast. New protocols can overtake current market leaders within weeks.

Stay on top of market developments. Enter early and exit before the majority.

Leave the last 20% to others.

When you're making profits, it's easy to want to perfectly time the peak and squeeze out every last percentage point.

But this is impossible—poor timing could turn you into a long-term holder by default.

Don’t be greedy.

2. Cut Losses Early

We all make mistakes, but the difference lies in whether someone sells after a 15% loss or holds on until down 80%.

Have an exit plan and predefined rules before entering any trade. This way, capital can be redeployed into more promising opportunities.

Example: Sell if losses exceed 15%.

3. Psychology of Taking Profits

You might hesitate to take profits out of fear of missing a "100x" move.

But even if you exit early and it later goes 100x, you still made money. The key is that you protected yourself from potential downside.

4. Take Profits

Until you lock in gains, everything is just a number on the screen.

There’s psychological comfort in recovering your initial investment, after which any remaining upside is pure profit that can continue growing.

Use simple formulas to guide your actions.

5. Wait for Market Sweet Spots

A sweet spot occurs when liquidity enters the market and the entire industry trends positively. These moments happen only a few times per year. Don’t participate in volatile markets out of boredom or the desire for excitement. You don’t need to trade every day. (Solana as shown in the chart)

6. Build a Balanced Portfolio

My long-term portfolio mainly consists of ETH, with some stablecoins held aside. These safer assets allow me to take larger risks elsewhere. I prefer a barbell strategy—combining safe holdings with high-risk investments.

7. Seek Alpha Plays

Many people lose money constantly chasing risky beta plays. An alternative is betting on market leaders:

Pendle for real-world assets (RWA)
Bananagun for Telegram bots (TG Bots)
Choose ETH over ETH beta alternatives

Potential for strong returns with lower risk.

8. Don’t Keep Moving the Goalposts

In 2021, my friend achieved his goal: turning $150K into $1M. But then he set a new target: “In a few more months, I’ll be set for life.” He misjudged the market top and eventually fell back to $150K. Know when it’s “enough.”

9. Never Lock Up Assets

I’ve seen too many people lock tokens for extra yield or points, only to get “rugged” by the protocol. Value optionality—you don’t want your tokens locked when the market moves faster than expected.

10. Avoid Single Points of Failure

1) Diversify stablecoins across USDC, USDT, and Dai

2) Use multiple centralized exchanges for deposits, in case one gets blocked

3) Spread your crypto across multiple wallets

11. Reinvesting Profits into Degen Coins Isn’t Real Profit-Taking

Taking profits means withdrawing capital from the market—converting gains into stablecoins, holding long-term, or cashing out. Reinvesting profits into degen coins is more like doubling down on a bet.

12. Never Allocate More Than 15% to Non-Blue-Chip or Non-Stablecoin Assets

In crypto, nothing is guaranteed, and no one is too big to fail.

Terra and FTX both collapsed.
Euler and Curve were hacked. Black swan events are more common than you think—protect your downside so you don’t end up at zero.

13. Stick to Your Circle of Competence

Pick 2–3 areas and go deep. Spending 10 hours per week focused on one niche will put you in the top 1%. Many risks stem from investing in unfamiliar areas simply due to FOMO.

14. Rebalance Regularly

Set target allocation percentages for your portfolio, which should vary depending on the market cycle phase. During bull markets, high-risk tokens perform well and can easily unbalance your portfolio—make rebalancing a regular habit.

15. Diversify Outside of Crypto

I often allocate profits outside of crypto—maximizing retirement accounts, building emergency funds, and reinvesting in businesses. This helps me better withstand volatility in crypto markets.

16. Avoid Talking About Crypto in Real Life

When traveling in developing countries, people wearing gold jewelry are more likely targets for robbery than those who stay low-key. Similarly, the more you talk about crypto in real life, the more likely you become a target.

If someone asks if I’m involved in crypto, I say I lost everything during the FTX collapse and now work in e-commerce supply chains. The wealthy tend to boast; true wealth stays quiet. Don’t draw unnecessary attention to yourself or your family. Avoid status competitions.

17. Use Proper Security Tools

You should use Rabby Wallet, Brave browser, DeFiLlama extension, Wallet Guard, etc. Thanks to the green llama from the DeFiLlama extension, I can confirm I'm on the correct protocol website.

18. Use Burner Wallets

I frequently try new protocols, so I keep a burner wallet ready. Even if a protocol turns out to be malicious, I lose no more than $100. Think of a burner wallet as a safety measure when dating on Tinder.