4 Key Points Every Crypto Trader Should Know
Use a stop-loss, or expect to lose.
A stop-loss is an invaluable tool every trader should employ when actively trading to mitigate downside risk on each position. By using a stop-loss, a trader can protect themselves from volatility in a controlled manner. Within a volatile trading environment, there are numerous pros and cons to trading with stop-losses at various price levels. For example, if you trade with a high margin of risk such as 10% for your downside risk, and you open five or more positions, a large overall move of the global market could cause you to lose 50% of your open positions. However, if you employ a tighter margin of error when using a stop-loss, a trader can protect themselves from large downside market movements.
With five open positions and stop-losses set to 5%, you would only be risking 25% of your trading positions on a large downside move. In effect, you would reduce your risk scenario by 50% by using tighter stop losses. On the other hand, a volatile market will cause tighter stop-losses to be hit more often, but the losses will be negligible. All in all, each trader will have to weigh the benefits and disadvantages of stop-losses on each position. Larger positions will generate higher profits but produce larger losses. Conversely, smaller positions generate lower returns and present a lower risk. A trader that chooses to split their trading account up between 5 positions will generate different results than a trader choosing to split their account between 10 positions.
Take Profit. Don’t Bag Hold. No Emotions
As a trader, you need to know what you’re doing, before you even do it. As they say;
“Plan the trade, and trade the plan”
As a trader, you need to know at which points you’re going to take profit, and when you’re going to cut your losses. Without a plan, you will quickly find your trading account eroding over time. Let’s say you’ve just entered a trading position, the asset you entered begins to rapidly increase in price, you begin feeling happy and euphoric. Because look at that! Your money is rapidly growing, but the growth soon hits a ceiling and begins to fall. What do you do? This is a critical junction, one that is very to easy to spot an amateur in. If you have to ask yourself what to do, you are not trading correctly. At this point, a trader is holding a position “hoping” the price moves back up. Hope will never work in the market, and if you trade with your emotions, the market will unforgivingly eat your funds. Take it from the Jedi, there is no emotion, there is only peace.
This type of an emotional notion is often based on illogical thoughts, an individual will easily convince themselves that the price of a good trade will keep going simply because they want it to “this event is coming up soon”, or “the rest of the market is doing well” etc. This is known as “bag holding” and you should never find yourself in this position. Do not hold onto a trading position “hoping” it comes back to a breakeven point. Additionally, if you did not plan your stop-loss, you can be left waiting for an indefinite amount of time. These types of maneuvers will quickly deflate the ego of a trader, and discourage them. You may even find yourself cursing and blaming the market or a source of information you chose to act on such as a youtube video, or a tweet without any further thought. You will quickly need to learn that every success and failure you experience in the market, is 100% directly your fault, and never the markets, or anyone else’s. The quicker a trader learns to take accountability for their actions and remove their emotions from the situation, the quicker you will learn how to become a profitable trader.
Don’t chase trades. Use Limit-Orders. Be patient.
As a trader, you will quickly learn the importance of patience, which can be one of the toughest skills to properly implement. Especially when you see the price of an asset begin moving in an upwards direction before your order has filled. However, you must resist the urge to “chase” trades and stick to your trading strategy. Remember, plan the trade and trade the plan. Chasing a trade is also referred to as FOMO or fear of missing out. Over time, every trader either learns how to maintain a level of discipline by exercising patience in their trades or, they end up giving their profit back to the market, bag holding, or even worse, they diminish their trading account entirely. Another trading pitfall is when a trader tries to force a trade to compensate for a previous trade. For example, if you lose a trade, do not go search for another trade just to negate that loss and the same concept is conversely true if you win, do not get ahead of yourself and give your profit back to the market.
These concepts can be applied through the use of limit-orders as opposed to market orders. By utilizing limit-orders, a trader can increase their overall profit by placing entry points below a price and allowing their orders to fill at a reasonable price level. As a general rule, you should avoid entering a position through the use of a market order. Often times, a price will fluctuate before any major move thereby allowing you to catch the bottom side and snare more profit with a limit-order. This is sometimes known as “buying the dip”. During a minor price fluctuation, you can fill an order below the average trading range. In doing so, you will find that your trades have become more profitable through the use of patience and limit-orders.
The Traders Toolbox — Trading Log.
Every single trader needs to implement a trading log when actively trading regardless of the timeframe being traded on. A trading log is an invaluable tool for every trader. By recording each trade, and details about that trade, you are effectively building yourself a data set that you can analyze to improve. It can be hard to know how far “up” or “down” you are, especially if you are trading in the cryptocurrency markets. Due to the price volatility, it can be very easy to lose track of how much you’ve lost and how much you’ve gained. A trading log will grant you insight into trading patterns you may not be aware of and give you a steady anchor to know whether you’re in the hole or not.
There are a few key metrics you should record including coin name, total satoshi in, total satoshi out, and the total net gain. You can easily calculate the net gain by subtracting the net Satoshi amount gained after a trade with the amount used to enter the trading position. In addition, you can log the date, time of day, and even how you feel or what you’re doing at that time. By doing this, a trader can see the bigger picture taking place in their actions. Perhaps most of your bad trades occur at a certain time of the day. If that’s the case, you should think about what you’re doing during the time these trades occur. What were you doing? Why did you choose that trade? Should you have waited to enter? By keeping a log of all your trades, you will be able to analyze, define, and refine your trading strategies.