My 10 Rules For Making Smart Cryptocurrency Trades
I have been in cryptocurrency for a couple of years now and I am by no means an expert. I still make mistakes and I still lose money from time-to-time. Even the big boy experts playing in the stock market still lose money, you'll see there are different levels of loss as you continue reading.
Over the last couple of years I have learned a lot about crypto, how the market works and how to spot opportunities. Here are some rules that I follow when I trade.
I started with $1300 and I was fortunate enough to grow this quite substantially, a lot of the times in the beginning it was just luck. Over the last couple of years I have taken some of that money out, because I am a huge believer in luck eventually running out, take a win from time-to-time can motivate you and protect you.
I am not a messiah and I haven't unlocked the secret to creating endless troves of wealth, but I have learned a thing or two about making and losing money.
1. Only invest what you can lose
I cannot stress how important this is: do not invest money that you can't afford to lose. Don't go investing grocery or rent money into cryptocurrency, it is highly speculative and until you find your footing, your chances of losing are still relatively high.
When I invested my initial $1300, I didn't just go into my bank account and take it out from my every day money. I actually saved up bits of money over time, I think it was about a six month period where I put small amounts into a savings account.
It really makes me cringe when I read stories of parents investing their children's education fund into cryptocurrency or taking their retirement savings and throwing it into crypto.
The one thing about investing in cryptocurrency that most traders avoid talking about, is eventually you will lose money and depending on how reckless you are, that amount will vary.
2. Tell your partner
I know people who actually hide their investment activities from their wives and while they have their reasons, ultimately I believe it is a bad idea.
Some of my best trades have come about after consulting my wife and asking her opinion. And I've actually been saved from losing money after asking for my wife's opinion as well.
Sometimes you get tunnel vision and you make poor decisions, you need someone to tell you when you're being stupid or reckless.
I cannot stress this enough, unless your partner is abusive and you'll get beaten up or hospitalised if they find out you're investing money, don't hide it from them.
3. Keep your eyes on Bitcoin
Bitcoin is the numer #1 cryptocurrency and while there are numerous choices when it comes to coins (altcoins), almost every time altcoins will take market cues from Bitcoin.
You'll actually notice a large percentage of altcoins will go down when Bitcoin is doing well, as traders sell off their other coins to buy into Bitcoin and ride the wave.
You will also notice that when Bitcoin is doing bad, altcoins usually follow Bitcoin's lead and go down with it as well, as Bitcoin is seen as the litmus test for market health and if Bitcoin is doing bad, it's a sign the cryptocurrency market might be suffering.
Before making a trade, unless you have strong evidence it's a good trade: see what Bitcoin is doing first. If it's going up, maybe consider holding off or if it's going down, wait for it to drop before buying in.
Some of my best trades have actually resulted from people dumping their altcoins for Bitcoin or similarly, cashing out their profits before a correction.
4. Diverisify
This is probably some of the strongest and best advice you'll ever get: diversify your investments.
You should NEVER throw all of your money into a single cryptocurrency, no matter how great the team is or if they've got news coming down the pipeline.
I've actually been in situations where I've bought into a coin, on the premise of immense hype and the price has actually gone and done the opposite, because Bitcoin decided to go on a bull run.
You might see people in the /r/cryptocurrency subreddit or on Telegram saying they are "going all in" - don't fall for the trap, sometimes people say things like that to trick people into FOMO buys. Or sometimes these people are being serious and it ends up bad for them.
As a personal trading rule, I always keep on hand a stack of Bitcoin and Binances BNB token (used for lowering fees on Binance).
5. Know when to take your profits
In many ways, trading cryptocurrency is like gambling. The feeling you get when you have a huge win like you're at a casino Blackjack table, it can be addictive, that hit of dopamine can be addictive and cause you to want to keep going.
You need to get into the habit of not being greedy, take your profits regularly. You hear some traders chanting the "HODL!" mantra, when you should be taking profits regularly (when given the opportunity). Even if you only make a small Satoshi profit, a profit is a profit.
I see it all too often, people hodl their coins and the market tanks. As time goes on and the price has yet to recover, the anxiety sets in and then the thoughts of self-doubt, "maybe I should have sold", "oh my goodness, I've lost everything", "my wife is going to kill me"
Don't be greedy, it's okay to take profits and anyone who tells you that it isn't either has made enough good trades to not have to worry or they're naive and will end up losing in the long-run.
6. Study, research, read and research some more
Before making an investment, you should always make sure you understand what you're investing in. Just because you can see a coin has gone up 50%, doesn't mean it's a good investment, it could mean it just got listed or had some good news.
Cryptocurrency markets are heavily manipulated by whales, pump & dump groups and expert traders, who use all kinds of tricks to scare and con people out of their money using fake walls (buy and sells), bots, spreading false rumours and hype. The list goes on.
If you invest blindly into a cryptocurrency project, you could be walking into a trap.
7. Stay level-headed, don't FOMO
This is the most common way in which inexperienced and sometimes even experienced traders lose money: FOMO. The fear of missing out, it taps into that part of your brain that makes you impsulsively spend money at the shops or get tricked into buying a time share by a salesman.
We witnessed the perfect case of FOMO in late 2017 when Bitcoin went on a rampage and hit $20,000 USD. Nobody knew when it was going to stop, it was possible that it could have gone way higher and then the price started to tumble.
I saw many traders angry they bought in at Bitcoin's all time high around $19k thinking it would continue to rise. At the time of writing this, Bitcoin is hovering around $11k (quite a drop, eh?).
FOMO trades will lose you money. It's possible you might get lucky and buy into a wave mid-way and get out unscathed, but there is a higher than average possibility that you'll lose money.
All coins eventually correct, it doesn't matter if it's Bitcoin or Litecoin: all coins eventually correct. Corrections are a normal part of any healthy market, it's unhealthy for something to just keep climbing in value.
8. If you're long-term hodling, move it into a wallet
Unless you're actively trading, you should NEVER trust that your coins on any exchange are safe.
There have been countless hacks on cryptocurrency exchanges over the last few years where coins have been stolen from wallets and to the point where the exchange cannot afford to recover the lost funds.
Even if you are trading a coin, say for example it's Bitcoin - keep only a small portion of it for trading (unless you're trading large amounts) and the rest in a wallet of some kind.
9. Avoid day trading
Unless you're an experienced trader, avoid day trading cryptocurrency. It is something I recommend that nobody does in cryptocurrency, ever. Even professionals with experience day trading in traditional stock markets lose money day trading.
Day trading involves trading on small interval charts (1m, 5m, 15m) to make quick trades, getting in and out as fast as possible. It's very easy to lose money really fast on day trading. It's high risk, high reward.
10. Use Stop Loss or Take-Profit Orders
With exception of coins you are hodling in the medium to long-term, stop losses can prevent you from losing a lot of money if you're actively making trades and trading in multiple coins simeltaneously to the point you can't watch them all.
A stop loss forces you to evaluate what your exit point is when a coin drops in value. Sometimes a stop loss can backfire if you don't setup your loss margin correctly, as a rule of thumb I have my margin set at 10%. Meaning if I take a loss, it'll only be 10% of my investment opposed to potentially losing 20,30,40% if a coin tanks.
On the other hand, you should use stop losses in combination with take-profit orders. A take-profit order is the opposite of a stop loss, it's a target exit point where you're happy to take a profit and sell your coins.
Just as important as a stop loss, a take-profit order can cause you to sell coins too early for say a 20% profit and the coin goes up 60% or even 100%+. But as we mentioned before, learning to take profits and not being greedy will be a profitable trading mantra to live by in the long-run.
Depending on where I see a coin going and what the charts are showing, I might only take a 15% profit on a coin. You should always use stop losses and take-profit orders with one another, unless you're hodling a coin medium to long-term.
11. Avoid signal/pump-and-dump groups
Yeah, the title said 10, but I threw this one in after publishing. Steer clear of signal/pump-and-dump groups, especially the paid ones.
Sure, you can make money from these groups, but besides the moral implications of partaking in organised manipulation of the market, you can still lose money.
In many ways, these groups are pyramid schemes. Sometimes the alpha dogs at the top of the pyramid will accumulate a stack load of coins, then put out the signal. If the group is big enough, they can impact the price significantly.
The alpha dogs at the top of the pyramid aka whales will then offload their coins, crash the price and the investors who didn't get out in time are left holding heavy bags.
Not all groups work like this, but always be weary of anyone promising to make you wealthy by taking your money and exchanging trading information.
Conclusion
These are not a set of must follow rules that you should live by. Cryptocurrency trading throws out many conventional rules of trading and you should always make your own choices. However, it is important that you have some kind of formula or strategy when trading, chaotic trading can be a disaster.