| Updated: October 30, 2024To predict market movement with 100% accuracy is impossible. The cryptocurrency market, as any other market segment, may deliver a shocking surprise at any moment, which brings forth the need for traders to have a reliable system in place to deal with such situations and preserve their capital. By employing a strict money management system, traders are able to keep their losses at minimum, while allowing their gains to accumulate.
If you intend to trade CFDs on Bitcoin, first, it is very important to determine what amount of funds you can afford to lose, or in other words, what is the maximum amount of money, which, if lost, will not disrupt your current lifestyle. Once that key threshold is determined, you should never put any amount larger than it at risk when trading.
Next, you should strive to develop a habit of setting stop-losses and profit targets immediately after you place your trading orders. Note that keeping a losing position, because you anticipate it to recover eventually, will undermine your capital and your emotional balance. It is better if you simply cut losses and look forward, rather than allow a losing trade to trigger a ”margin call”.
In case you are making your first steps in Bitcoin CFD trading, it is absolutely essential that you do not risk an amount larger than 1% of your trading capital on a single position. Even if you accumulate several losses in a row, you should not lose your confidence, as you will still have plenty of your capital left. Instead, pay a closer attention to the details of your trading method; maintain a trading journal where you describe market conditions, the reasons for each of your trading decisions as well as the results from your trades; double and triple test your strategy on a demo account and analyze the results. Once you feel ready to return to your live account, make sure you stick to your trading plan and money management system.
In time, as you amass more trading experience, you may gradually begin to increase the amount per trade put at risk. It is advisable, however, that you do not risk more than 5% of your trading capital per position. Note that amounts equal to 4%-5% of the current capital could be risked only on high-probability trades with the most suitable risk-reward ratio.
If you are successful in CFD trading, this rule will allow the size of each of your positions in absolute terms to increase gradually as your trading account expands. If you are not successful, the rule will keep losses at a minimum and you will be allowed more time to adjust your trading method and/or enhance your understanding of the market.
With Bitcoin CFDs it is reasonable to stick to a risk-reward ratio of 1:2. For example, you may place your stop-loss on a given trade at a price level which sets the maximum loss at $100, while your profit target may be at a price level which ensures a maximum gain of $200. Thus, in this case you risk as much as $100 in order to gain $200. For a detailed discussion on the risk-reward concept, you can check our Forex Academy.
The daily chart above visualizes a long trade in Bitcoin where a 1:2 risk-reward ratio is used. The entry has been made at $3,075.60 per coin, the protective stop has been placed below the last prominent low, at $1,804.60 per coin, while the targeted profit has been set above the last prominent high, at $5,617.60 per coin.
A risk-reward ratio of 1:2 will actually ensure that one successful trade compensates for two unsuccessful ones. Of course, it is important how you select your trades and how to fine-tune your strategy, so that you take only those trades which could satisfy a 1:2 risk-reward ratio. Managing to select only the trades that satisfy your ratio is a way to achieve consistent profitability in a longer term.
The ratio we proposed in the current article is not necessarily the most appropriate one. Through experimentation (preferably on a demo account), every trader should determine for themselves what risk-reward configuration best suits their trading plan as well as their trading objectives.