Managing risk when trading cryptocurrencies

What is crypto risk management?

Risk management in cryptocurrency trading involves using deliberate strategies and tools to help control your exposure to potential losses while you pursue trading opportunities. The goal isn't to eliminate risk entirely – that's impossible in any form of trading – but rather to understand, measure and manage your exposure to market movements in a structured way.

When you trade cryptocurrencies with IG, you're trading contracts for difference (CFDs) on digital assets. This means you're speculating on price movements without owning the underlying cryptocurrency. Your profit or loss depends on whether the market moves in line with your prediction. Importantly, losses can exceed your initial deposit when trading CFDs, which makes risk management a fundamental part of your trading approach.

Why does risk management matter for crypto trading?

Cryptocurrency markets present unique characteristics that make risk management particularly important.

Round-the-clock volatility

Unlike traditional stock markets that close overnight and on weekends, crypto markets never sleep. Bitcoin, ether and other digital assets trade continuously, 24 hours a day, seven days a week.¹ This means significant price movements can occur while you're away from your screen – during your commute, while you're sleeping or over the weekend.

Rapid price movements

Cryptocurrency prices can shift dramatically in short timeframes. A regulatory announcement from a major economy or a technical issue with a blockchain network can trigger substantial price swings within minutes or hours.

Leverage amplifies both gains and losses

When you trade cryptocurrency CFDs, you're using leverage. This means you only need to deposit a percentage of the full position value to open a trade. While this can magnify potential profits when markets move in your favour, it equally magnifies potential losses when they don't. A 10% adverse price movement on a leveraged position could potentially wipe out your entire initial deposit – or more.

Market sentiment drives prices

Cryptocurrency markets can be particularly sensitive to shifts in sentiment. News about regulatory changes, institutional adoption, technical developments or security breaches can rapidly change market psychology and drive significant price action.

Without appropriate risk management, any of these factors could turn a manageable loss into a substantial one that impacts your ability to continue trading.

Key risk management strategies

Position sizing

Position sizing determines how much of your trading capital you allocate to a single trade. Many experienced traders keep individual positions to between 1% and 5% of their total trading capital. This approach means that even if several consecutive trades move against you, you could still have sufficient capital to continue trading and potentially recover.

For example, if you have A$10,000 in your trading account and limit each trade to 2% risk, you're risking A$200 per trade. Even if you experience five losing trades in a row, you'd still have 90% of your capital intact.

The mathematics of position sizing could work in your favour over time. Preserving capital during losing periods means you need smaller percentage gains to recover. If you lose 50% of your capital, you need a 100% gain just to break even. But if you lose only 10%, you need just an 11% gain to recover.

Stop-losses

A stop-loss is an order that automatically closes your CFD position when the market reaches a specified price level. This tool helps you define your maximum acceptable loss before entering a trade, rather than making emotionally-charged decisions while a position is moving against you.

When setting stop-losses, consider the natural volatility of the cryptocurrency you're trading. Bitcoin might routinely fluctuate 3-5% in a day during normal conditions, while smaller cryptocurrencies might see even larger swings. Setting your stop-loss too tight could result in being stopped out by normal market noise, while setting it too wide might expose you to larger losses than your risk tolerance allows.

Guaranteed stops

Standard stop-losses work well in most conditions, but cryptocurrency markets can sometimes 'gap' – jumping from one price level to another without trading at prices in between. This typically happens during periods of extreme volatility or when markets reopen after maintenance periods on some platforms.

A guaranteed stop² ensures your CFD position closes at your specified stop level, even if the market gaps past it. You'll only pay for this protection if it's triggered.

A guaranteed stop can be particularly valuable in CFD crypto markets, where weekend gaps or sudden news events can create price discontinuities that standard stops might not protect against effectively.

Risk-reward ratios

Before entering any trade, consider the potential profit compared to the potential loss. This is your risk-reward ratio.

Many traders aim for risk-reward ratios of at least 1:2, meaning they're targeting potential profits that are at least twice the size of their potential losses. Some pursue even more favourable ratios of 1:3 or 1:4.

Why does this matter? With a 1:2 risk-reward ratio, you could be profitable overall even if only 40% of your trades are winners. The larger winners more than compensate for the smaller, more frequent losses. This mathematical edge can be the difference between profitable and unprofitable trading over time.

Portfolio diversification

Rather than concentrating your entire crypto trading on a single asset, you might consider spreading exposure across different cryptocurrencies or even different asset classes.

Different cryptocurrencies don't always move in perfect correlation. While bitcoin might be declining, certain other digital assets might be rising based on specific developments in their ecosystems. By trading multiple cryptocurrencies, you can reduce the impact of any single asset's performance on your overall portfolio.

You might also consider balancing crypto trades with positions in other markets – forex, indices or commodities – to further diversify your exposure.

Leverage management

Leverage is a powerful tool that requires careful handling. When you're new to crypto trading, or trading a new strategy, consider starting with lower leverage ratios until you understand how different levels of leverage affect your position's sensitivity to market movements.

Even experienced traders often use different leverage levels for different market conditions. During periods of high volatility, reducing leverage provides a buffer against extreme price swings. During calmer conditions, they might be comfortable with slightly higher leverage.

The most appropriate leverage level depends on your risk tolerance, trading strategy, market conditions and experience level.

Psychology and discipline in risk management

Planning trades before entering

One of the most effective risk management practices is deciding your entry point, stop-loss level and target profit before you enter the trade. This planning happens when you're objective and not in the heat of the moment when money is at risk.

Write down your plan if it helps you stick to it. Define specifically: why you're entering this trade, where you'll exit if it moves against you, where you'll take profits if it moves in your favour and how much you're risking.

Avoiding revenge trading

After a losing trade, the temptation to immediately enter another position to "win back" the loss can be strong. This revenge trading often leads to poor decision-making, as decisions are driven by emotion rather than analysis.

If you experience a loss, particularly a larger one, consider stepping away from the markets for a break before entering your next trade. Ensure your next trade is based on your trading plan and proper analysis, not on emotional reaction to the previous loss.

Keeping a trading journal

Recording your trades – including your entry reasoning, position size, stop-loss level, exit point and outcome – creates a valuable record for review. Over time, you might identify patterns in which types of setups work best for you, which market conditions suit your approach and where your risk management could improve.

Risk management tools on the IG CFD trading platform

1. Stop-loss and limit orders

Set predefined exit points for both losses and profits. Once set, these orders work automatically, executing when the market reaches your specified levels. You can adjust them as market conditions change or as your trade develops.

2. Guaranteed stops

Available on select markets, guaranteed stops² ensure execution at your specified level regardless of market gaps or volatility. The premium for this protection is only charged if the guaranteed stop is triggered.

3. Price alerts

Set notifications to inform you when markets reach specific levels. This allows you to monitor multiple cryptocurrencies or key technical levels without watching charts constantly. Alerts work across our mobile and desktop platforms, keeping you informed wherever you are. However, alerts are for information use only. For managing existing positions, still consider using stops and limits.

4. Charts and technical indicators

Access professional charting tools with technical indicators that can help identify potential support and resistance levels to inform your stop-loss placement and profit targets. Available indicators include moving averages, Bollinger Bands, RSI, MACD and many others.

5. Demo account

Practice implementing your risk management strategies without risking real capital. Our demo account provides access to live market prices and the full range of risk management tools, allowing you to test your approach in realistic conditions before trading with actual funds.

FAQs

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Footnotes: 
¹ With IG, you can trade cryptocurrencies from 8am on Saturday, and is available to trade until 10pm on Fridays (UK time).
² You’ll pay a small premium only if your guaranteed stop is triggered. Guranteed stops are not available for Pro traders.