Trading on an exchange carries specific risks that must be taken into account when starting to trade. We will consider the risks when trading on cryptocurrency exchanges.

The following categories of risks can be identified:

  • Market(trading) risks
  • Financial risks
  • Psychological risks
  • Exchange risks
  • Legal risks
  • Technological risks
Let's take a closer look at each category.

Market risks

Market risks are understood as risks that arise as a result of the trader's own actions and which he can influence directly. Such risks can include:

  • Trading strategy (more risky or less risky)
  • Choice of cryptocurrency symbols
  • Entry point

disclosed in the corresponding section. From the point of view of risks, this is a medium-risk strategy, which, among other things, depends on the grid parameters, such as: the width of the coverage, the grid step, the method of entry. Varying these parameters, you may get the balance of risks, profitability and required trader's participation in a required proportion. For example, if you set a wide range and a small step of a grid, the bot will work at very big jumps of the rate, but the margin from each transaction will be small, because the capital will be distributed on a large number of grid lines. A grid of one row can be regarded as a degenerate case of a grid. Yes, all funds will be concentrated on one line, but the probability of exceeding such a grid is very high and the bot will stop trading. In any case, selection of the optimum grid parameters is a routine analytical work.

The choice of trading pairs also carries certain risks, because all cryptocurrencies are very different, with different purposes, different capitalization and trust of traders and users. In general, the following principles can be outlined:

  • Trading altcoins is more volatile and profitable, but more risky, because altcoins can fall in value and for a very long period (and maybe never) do not return to the desired rates
  • To reduce the risk, we recommend to trade as stable and important pairs as possible, such as BTC/USDT, but the profit will be much lower than when trading altcoins
The rate at which you enter the trade is very important. For a grid trading strategy we recommend you to enter at average rates between the historic minimum and maximum; then you can make profit from trading both when the rate is rising and when it is falling, and the return of the rate to the desired levels is more likely than if you enter, for example, at the very peak of the price. Do not rush to enter the position, it is better to wait for a more favorable rate to enter than to enter "by chance" and then wait for a long time before the rate rises or falls to the desired level.

Financial risks

Financial risks can include the risks associated with the allocation of personal finances to trading and the allocation of these finances to trading bots. Allocation of funds for trading is a very individual factor of the volume of funds and their structure. This issue should be approached very thoughtfully and carefully. We recommend:

  • - DO NOT start trading with borrowed funds.
  • - Do NOT trade with "last money", because other risks (personal or family) can trigger, and you will be forced to close positions and probably at a loss. Always reserve some "to live" money for the family, so that you can choose the most profitable moment to exit the trade
  • - DO NOT trade with leverage. In our opinion, grid order trading does not mix well with leveraged trading. The leverage narrows the possibilities very much in case of unfavorable market movements

The funds allocated to trading can also be disposed of in different ways, for example, they can be invested in one trading pair or allocated to several pairs. Practice shows that even with a clearly expressed general trend in the cryptocurrency market, some coins do not follow the market or follow it with a significant lag in time, so multiple trading pairs is a justified approach.

Financial risk mitigation can also include an approach whereby the trader withdraws part of his profits into fiat currencies, thereby returning the allocated funds to the trade. After a full return, one can consider more risky symbols/strategies/parameters of the trading bot.

Psychological risks

Psychological risks can include such risks, which may arise due to the psychological state of the trader and affect the result of the trade. When a trader sees an increase in the value of acquired assets it has a positive effect, but when the value of assets falls, especially long in time, not everyone can calmly endure the negative impact. It is important to understand that spontaneous and impulsive decisions under the influence of negative emotional factors can often lead to losses. Follow a trading strategy and do not succumb to emotional impulse. Trading is fundamentally profitable when your actions are taken against the market in the moment - buy on a falling market, sell on a rising market.

Exchange risks

Exchange risk is the risk of working on a particular exchange. Essentially, you are entrusting your funds to an exchange and trusting the exchange to execute your orders. The most significant exchange risk is hacking. Hack can be done by third parties (hackers) or the exchange itself "gets its hands on" the hack, but for the trader it poses only one risk - the loss of all or part of his funds. This risk cannot be influenced by the trader in any way, so we can recommend as methods to reduce the impact of this risk:

  • Trade on multiple exchanges (all at once will not be hacked)
  • Periodically withdraw part of profits from trading to external wallets
In addition to these risks, there are actions of the exchange, counteracting or complicating the withdrawal of funds.

Legal risks

Cryptocurrencies are a fairly new phenomenon and almost all countries have just formed understandings and laws regulating cryptocurrency transactions. It is necessary to take into account the specifics of the countries where you pay taxes, reside and trade. Risks can be different, from fines to imprisonment - this should be taken into account when you start trading and making a profit.

Technological risks

Technological risks include risks that arise when a user transacts with cryptocurrency in principle, not just in trading operations. These may include:

  • Loss of access to a cryptocurrency wallet or exchange account
  • Sending cryptocurrency to the wrong wallet number
  • Theft of funds as a result of a virus infection

Because of these risks, we recommend:

  • Always use a separate computer or virtual machine to perform all operations with a cryptocurrency wallet. Do not run software on such a computer except for the wallet software, do not visit sites not related to cryptocurrency or exchange
  • Do not install or use software on your smartphone
  • Always enable 2-factor authorization on exchanges
  • Always check the address you are sending money to, so as not to get the virus, replacing the clipboard addresses with other ones.
  • Regularly make backups of the wallet folder on a drive different from the one where the wallet is located
  • Keep the seed-frases from a wallet in the handwritten variant in the place known only to you
  • Mail, to which the exchanger account is attached, should be opened on another computer and not received on the smartphone. Mail and sms notification delivery channels must be on different physical devices
Compliance with these rules will greatly reduce the risk of losing access to the wallet or exchange account.