Trading 101: Understanding Risk Management

This article explains the need to formulate a proper risk management strategy and how Bitget risk management system helps you stay ahead of the game.

What is risk management?

Risk, in its broadest sense, describes the possibility that something bad will happen, thus presents itself in many instances of our daily lives. Acknowledging this possibility and finding a way to curb it are the basic steps of risk management practised by many of us, who are not even aware of these technical terms.

Definition

Financially speaking, risk management is defined as the framework developed to protect a firm’s capital base and earnings against possible threats, while ensuring its continuous growth. A comprehensive risk management system will help reduce costly expenses (in case an unwanted scenario manifests itself) and efficiently affect the strategic choices needed.

The three risk categories

All risks should be classified based on their qualitative distinctions. The first category is preventable risks, which refer to all internal risks that are controllable via active prevention, such as unconscious mistakes. Then there are strategy risks, i.e. the risks arising from decisions related to a firm or even an individual’s objectives. Strategy risks are different from preventable risks in that some people are willing to take on these risks to achieve their goals, but preventable risks are completely undesirable.

Last but not least are risks caused by external factors, e.g. natural disasters, geo-political issues. Strategy risks and external risks require the implementation of a thorough risk management process, though the best one can do to prevent external risks is to acknowledge them and plan corresponding mitigation schemes.

The process

Source: Invensis Learning

The risk management process mainly aims for strategy risk and external risks. This includes 5 consecutive steps of risk identification, risk analysis, risk evaluation, risk treatment and monitor and review. For risk identification, it is important to note down as many risks as possible. Even insightful, relevant information can help complete the overall risk picture.

Risk analysis means to determine the scope of risks, their frequency as well as their severity. These data are then used for risk ranking in the third step, risk evaluation. Now that the risks are identified and sorted by importance and urgency, recommendations for risk treatment are generated.

As some risks cannot be eliminated, they need to be monitored on a regular basis. Besides, keeping track of risk changes and measuring the efficacy of responses are required for process evaluation. These are activities concerned with monitor and review.

Managing the risks associated with financial markets

Financial risks have the power to tremendously affect the success of investments and can very well lead to capital losses. As a result, traders universally acknowledge the need for a robust risk management strategy, which will prepare them for all kinds of situations.

The four major risks in financial markets include credit risk, liquidity risk, market risk and systemic risk.

- Credit risk is the risk of loss when a party does not honour their contractual/financial obligations and will be significantly reduced if traders enter into transactions on a renowned exchange such as Bitget. The exchange here will play the role of a guarantor for both sides of the transaction.

- Liquidity risk describes the inability to exit a position. Again, this risk can also be treated by trading on reliable platforms as there are more active users and consequently better liquidity.

- Market risks are driven by several factors, for example interest rates, exchange rates, etc. It is the most obvious type of risk, hence the state of knowledge is absolutely crucial for traders’ survival.

- Systemic risk refers to shocks that can break down an entire industry or system. Portfolio diversification serves as the easiest solution for minimising the impact of systemic risk.

Other risks that are common in the cryptocurrency space include:

- Volatility risk: The amount of uncertainty in relation to the size of changes in asset value;

- Operational risk: Happens when the organisation or project’s operations are disturbed;

- Regulatory risk: The probability of losses incurred by changes in laws and regulations;

- Cyber risk: Cyber hygiene and safeguards are extremely important in cryptocurrency markets, where security breaches can manifest themselves in many different ways of Ransomware, Phishing, and the list goes on.

The risk management system on Bitget

Launched in 2018, Bitget is now the dominating crypto derivatives trading platform with multiple innovative products. The three pillars of our customer orientation are integrity, transparency, and the preservation of a true “win-win” environment for all parties involved. We also strive for a comprehensive risk solution to all crypto traders via the three tranches of our product design philosophy, activities and liquidity, together with our records of top security.

The philosophy of our product design

Every trader can find their personal option on Bitget: Bitget Spot Trading for complete asset ownership, Bitge t USDT-Ⓜ Futures for cautious traders, Bitget Coin-Ⓜ Futures for crypto diehard and Bitget One-Click Copy Trade for those who want to generate a passive income stream with minimum risk. All data is updated real-time for better monitoring and management. In addition, Bitget carefully analyses each transaction before publishing the relevant data on the website to ensure that the information given is transparent and accurate. Bitget commits that the publicly available data accurately and fully reflects the actual trading activity of professionals. Therefore, more and more investors confidently choose to use Bitget's One-Click Copy Trade.

Already integrated in our products is the margining system, which encourages traders to reevaluate their positions on a daily basis. To learn more about Bitget’s innovative solution, check out our guide on Margin Trading here.

The crypto market never sleeps. It is impossible to keep up with the news and market changes 24/7, therefore our users are given the four conditional functions of Limit Order, Trigger Order, Stop Loss and Take Profit to automate their transactions. We are proud to herald these “the tools of liberation”.

Activities and liquidity

We have a huge customer base of 8 million users from 100 countries worldwide. In terms of scale, Bitget is indeed the world’s largest digital copy trading exchange with 80,000 professional traders, 380,000 followers and a total of US$20 million in accumulated traders profit sharing. Bitget is acknowledged as the Top 3 Crypto Derivatives Exchange in terms of Liquidity by TokenInsight, once again confirming the easy liquidity achieved thanks to our efforts.

Maximum security

We have obtained operating licence in the top regulated jurisdictions - the U.S, Canada and Australia. Regarding security problems, Bitget implements a holistic risk control process with hot and cold wallet segregation, which is supported by big names in security tech: Suntwin Technology, Qingsong Cloud Security, HEAP, Armors, just to name a few. Our focus on the security and compliance aspects helps us secure our place in the top 10 Exchanges by Cybersecurity Rating from Crypto Exchange Ranks (CER), and receive 12 A+ Ratings from SSL Labs.

If you are new to the space, our customer service team is available 24/7 to assist you on every step!

Start trading with Bitget today and do not forget to follow Bitget Academy for more industrial insights:

Twitter | Telegram | LinkedIn | Youtube | Facebook | Instagram