3 Sorta Simple Ways to Manage Direction Risk for Crypto Traders

Trading is all about taking risks, so it only makes sense that managing risk is one of the most important jobs for any trader. 

Crypto traders have many, many ways to reduce or manage their risks. This article focuses on a few methods I personally use in my own trading. Some of them may be helpful for readers – some may not be. Keep reading to find out…?

Stink Bids (and Asks)

Setting bids or asks that are lower or higher than the exact price a trader wants to enter the market can help achieve a more favorable entry depending on how the price moves.

For example, if a trader wants to put on a $100 long position, instead of setting a $100 buy order at a specific price, they can ladder 10 orders for $10 each around the price they want to buy at. This keeps the position size the same, but the volatility in that position is reduced compared to one entry at one price point. If the market experiences a temporary pullback or a sudden dip (or pump), the lower bids (or higher asks) may get filled. This is great because it enables the trader to get the same position opened on an asset at a better price than their original planned entry price.

This approach has some drawbacks. For example, the market may only fill some orders and then move away from them, which obviously results in less profit than one single entry. But how often does anyone get the perfect entry with an instant market reaction in the direction they want? Exactly.

Crypto markets are also known for stop hunts, which suggests that it is better to set “stink” orders lower or higher than the target entry price, for longs or shorts respectively. Having multiple orders set like this can help achieve better entries, assuming a trader will not get the perfect entry by setting one order.

This strategy allows traders to avoid entering the market at a single, potentially unfavorable price point, and it provides a better risk-reward ratio by reducing the impact of short-term market fluctuations on their overall position. If this tactic appeals to some readers, stop reading here and go on grab a pen and some paper – start thinking about how to get more creative with this approach, specifically with scalp trading (there are plenty of ways). 

Options

Another option for managing risk is trading options (yay, so fun!). But even options can help manage risk successfully. This section does not cover every possible way to trade options – it would be way too long. But here are a few things to think about. Should a trader hedge with in-the-money (ITM) or zero days until expiration (0DTE) options? It depends on what the trader wants to accomplish.

But first, readers should be fully aware that they need to learn options markets first before even thinking about adding it to their trading system.

So, one way to hedge with options is by purchasing puts. A put option gives the holder the right (but not the obligation) to sell an underlying asset at a specified price (the strike price) within a predetermined time frame. Traders can protect their long position against potential downward price movements by buying puts.

Another way that’s more degen but has lots of room for creativity is 0DTE. Suppose that a trader has a significant long position open on bitcoin, and they also anticipate a high level of market volatility due to something like macroeconomic data release or a regulatory announcement. To hedge their long position against the risk of potential downside, they could decide to employ a 0DTE option strategy.

To do this, they could purchase a 0DTE put option with a strike price slightly below the current market price of bitcoin. So, for example, if Bitcoin is trading at $50,000 per coin, they might purchase a ODTE put option with a strike price of $49,000. If a regulatory announcement triggers a sharp decline in Bitcoin's price, the value of the put option will increase and some of the losses incurred on their long position will be offset.

Pair Trades

A third and final way (at least for this article) to consider using for risk management is pair trading. Now, it is important to realize pair trading does not mean a trader has eliminated risk. But it can be useful for reducing volatility if a correlation is still intact. As an example, consider a trader who thinks SHIB will go up because Elon Musk will tweet something this week (or this month), or whatever. One way to act on that opinion is just to buy SHIB. But SHIB can be volatile and that trade could end badly if the trader is wrong, and Elon does not tweet anything.

Another way to take a similar trade is through a pair trade. The trader could say, “If Elon tweets something, then SHIB will go up. But DOGE will also go up because it’s in the same meme coin category. But it will not go up as much as SHIB.” So, they decide to long SHIB and short DOGE. That’s the pair trade.

Now, the trader definitely has to correctly size both positions according to their risk preferences. And even though this idea may sound super appealing, pair trades can still take losses. For example, SHIB could go down and DOGE could go up, which means the anticipated correlation breaks, and the trader loses money. 

Keep Trying New Things

Good risk management often requires creativity and having an open mind to try new things. Maybe some of the ideas in this article will be helpful, or maybe some readers don’t like any of them. That is okay. These are all basic ideas, and there are lots of other creative ways to reduce directional risk. Maybe I’ll explain other ways in a later article.