This article Ten Rules for Trading Cryptocurrencies focuses on the trading aspect of cryptocurrencies and advises investors and traders alike on how to profitably trade and not get burned in this market.
For a long time, innovations like Virtual Reality (VR), Augmented Reality (AR), Driverless Cars, Solar Power, Drones have been out of reach to the common man on the street. You had to have large amounts of capital, human resource and connections to participate in any of them.
With the blockchain revolution, the average man on the street is now able to participate in this structural change, and they do it through cryptocurrencies. By crowdsourcing funds from the public in exchange for tokens that have potential to increase in value, companies can now build currencies and platforms without that capital from private investors.
The man on the street also sees this as exciting. After all, they now have a chance to participate in companies that have high potential, long before they get listed on the stock exchange.
Of course, this is highly risky. Many of these cryptocurrencies are still in their infant stages without any working product. It is the wild wild west out there – people trading cryptos with one another with the hope of making a profit.
So can you make a profit by trading? You can, if you follow these rules.
1. Don’t FOMO
With all the hype and craziness, and seeing coins going up over 1000% or even 10,000%, it’s easy to get sucked in. After all, every platform coin wants to be the next Ethereum and every cryptocurrency wants to be the next Bitcoin.
When you see that big green candle shooting up, you no doubt get the feeling that if you don’t get in now, you’ll forever miss the boat. However, again and again, this line of thinking has proven to be unprofitable. Traders who jump into a pumped coin too late end up becoming a bagholder – they have no choice but to hold on to a coin that’s in the red.
So don’t fear missing out on the next Bitcoin or Ethereum. There are many opportunities and many more to come. Don’t feel like you’ve missed your chance – this is just the beginning of the crypto revolution.
If you miss the pump, just stay away from it. Don’t look at it and instead, look for undervalued coins that you can potentially buy before their turn to pump comes.
2. Don’t FUD
Conversely, don’t let fear, uncertainty or doubt get the better of you. When China announced the ban on ICOs in September 2017, Bitcoin fell about 40% from its peak on that single announcement.
At that moment, you must have felt the sky was falling. Crypto markets had a bloodbath and your investments were falling over 50%. There was tremendous fear in the market – this would be the worst time to sell.
Truth is, Bitcoin and the blockchain are innovations that will stay around for years to come, whether governments like it or not. In fact, Bitcoin was precisely created to get around government intervention and regulation.
When you let fear, uncertainty and doubt get the better of you, you’re going to make huge losses, and potentially walk away from cryptocurrencies altogether.
3. Manage your Capital
Cryptos are highly volatile and there is a chance you’re going to lose up to 100% of your portfolio. If the stock market dropped 20% on any given day, it would be called a historic financial meltdown. In crypto, it’s called Monday. or Sunday. It happens all the time.
With that in mind, it’s important you only trade what you can lose. Don’t go all in thinking you’re going to become the next Winklevoss Twins or the next Bill Gates. You won’t be, not when everyone else is trying too.
A recommended percentage of your capital to use would be about 10%. That way, even if cryptocurrencies become a failed project, that’s the most you will lose. You will still retain 90% of your investment portfolio, and enough ammunition to fight another day.
Remember, put only what you can lose.
4. Be fearful when others are greedy, and greedy when others are fearful
Warren Buffet’s sage advice applies here in this market very well. When everything is down, everyone is depressed and people are starting to throw in the towel, that’s when you know it’s time to enter the market.
When your neighbourhood baker is posting on Facebook that she made 50% in a few days and starts dishing out financial advice to her Facebook friends like she’s an expert, it’s time to get out.
The temptation is always to leave your winners running all the way. While that may apply in some cases, it is actually a wise thing to withdraw your profits when people are getting too hyped about a coin.
Personally, I used market sentiment to time my exit from Ripple (XRP) and NXT (NXT) in Dec 2017, which saved me a big heartache. When everyone on twitter was talking about how Ripple was going to reach $5 and replace Bitcoin, I knew it was time to run. I took a 500% profit and headed for the hills. Even though I didn’t sell the top, I’m glad I sold.
5. Most altcoins go to zero
95% of all businesses that start up in the first year fail. It will be the same for altcoins. Altcoins all have companies behind them, and the altcoin’s value is tied to the success of the start-up behind it.
HODL (Hold on for Dear Life) sounds like good advice. But it isn’t. Not always. Because most altcoins go to zero, you have to do serious due diligence on them if you want to HODL them! Keep checking and reading about the development work to ensure that someone is actually doing work to improve it and increase its adoption.
If you don’t, you might end up holding a bag of coins that are completely worthless a few years down the road.
The only good crypto to HODL is Bitcoin, in my opinion.
6. Do your due diligence for ICOs
Similarly, watch out for the Initial Coin Offerings (ICOs). ICOs have become such a convenient way to raise money that everyone is running their own ICO.
If altcoins were risky, ICOs are even more so. In fact, many ICOs are just scams without any intention of building a real working product.
So the chance of you actually getting caught in a trap by some great marketing of ICOs is high. You have to be extremely sceptical and well-versed in valuation to determine if a coin is worth buying.
Right now, common knowledge in the crypto scene says that you have to visit the Slack Channel of the company to see its activity and judge the responsiveness of the developers, join the Telegram chat and so on. Also, you have to do research on the team behind the ICOs.
Are they just a bunch of nice looking guys in suits or are they genuine business and product developers that can take the company forward? These are pertinent questions that you need to answer before investing in ICOs.
Don’t follow people on social media blindly. Most people talk about coins they already own, naturally, because they want to see it rise in value. Listen with a sceptical mind and make your own judgement.
7. Buy the hype leading to the airdrop
The saying goes, buy the rumour sell the news. This is true in cryptocurrency, which sees significant price rises leading up to an announcement and then the price immediately falling after the announcement.
The increase in value from rumours could be 10-50% and then fall back after the news is announced. It’s a strange world – people buying a coin based on a potentially positive event that will happen, but selling it off immediately after hearing the ‘good news’.
This is just game theory at work. In trading, it’s about who can sell at a higher price than someone else. Traders who anticipate a pump on a coin will naturally buy the coin and pump it. It’s a self-fulfilling prophecy. Likewise, after the news is announced, because traders expect prices to fall, they sell early to maximize their profits – and this market behaviour basically causes the price to fall.
This buy-the-rumour and sell-the-news work especially well in airdrops. When airdrops are announced for certain platform coins, the coin starts appreciating in value because there are two groups of people 1) people who want the free coin 2) the people who know that others want the free coin and want to trade it for a quick profit.
Typically 2) wins out. This is seen in the airdrop for NXT and ZCL especially, where the coin dumped hard almost instantly after the snapshot was done for an airdrop. And we’re not talking 10-20% drops. We’re talking 70% drops.
So a trade idea is simply to buy a coin as an airdrop is announced, and then sell off quickly as its price appreciates before the airdrop actually occurs.
8. Have a clear strategy
Like typical trading, you need a clear strategy before you enter a trade. Without a clear strategy, you’ll end up being a victim of FOMO and FUD – you’re just going to buy and sell based on fear and greed – a recipe for trading disaster.
Are you going into the crypto markets because you believe in blockchain’s long-term potential? Then your strategy might be a buy-and-hold for an indefinite term. If that is your strategy, you have to shut out the noise from day-in-day-out. It’s going to be a wild ride until we get there.
There are so many people who claim they are HODL-ing Bitcoin and cryptos but yet look at the news and their Blockfolio app every few hours. In the end, they get sucked in and make a bad trade due to the emotions and screw up their initial strategy.
Perhaps your strategy is to trade the volatility. Great, then set your stop losses and profit targets for each trade. You might get it wrong sometimes, but that’s normal – if a trader can win 60% of the time, he’s already very successful. The key to trading volatility is to have a good back-tested system that will generate profits over the long run.
Key here is this: Know why you’re in for and don’t deviate from your strategy.
9. Learn technical analysis
Some people in the Twittersphere have said that “Cryptocurrencies are a completely new market, technicals won’t work!”. Well, it depends on what you’re talking about.
Technical analysis studies price action, and price action is affected by human psychology. And that’s the same whether we’re trading stocks, forex or cryptos.
To say it doesn’t work would be careless and prideful – something that comes before a big fall (in your portfolio). Technical analysis is never 100% accurate – but it does give you insight into a coin at a particular point in time.
Take the time and read up on charting patterns and learn about Japanese candlesticks. Learn about the indicators that others use to gauge market sentiment and price action. You’re going to be rewarded greatly if you make good calls!
10. Don’t overtrade
Don’t overdo your trading. Just because the cryptocurrency markets are so volatile and full of opportunity does not mean that you have to be in every trade. Newbie traders make the mistake of thinking they need to be watching the market 24/7 to hunt for opportunities, so they enter and exit trades multiple times a day.
Yet, sometimes the best move you can make is to do nothing.
In fact, experienced traders may only enter 2-3 trades a week. They’ll make enough money on those trades and then end their week there and then! How’s that for a trading lifestyle.
The secret is this: They have particular setups based on their personal strategy which they look out for. Once they spot the setup, they enter the trade, set their stop loss and profit targets. Then they move on – they don’t need to keep staring at the screen and watch the ticker go up or down.
If they can’t find their setups, they just stay patient and wait it out.
What’s more, cryptocurrency exchanges charge a small percentage fee every time you trade (0.1% onwards depending on platform). The more you trade, the more you pay.
There you have it. The top ten rules for trading cryptocurrencies. Remember, you’re in the wild wild west here… don’t get destroyed by the markets! Take risks, but don’t be risky!
What is your top trading tip? Leave your answer in the comment section below!
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