If you are new to the cryptocurrency space, or trading in general, it is my hope these tips help you avoid many of the common mistakes I faced when starting out.
1. Trading is a psychological game and your only opponent is yourself.
Emotions like fear and euphoria are your biggest hurdles. Fear causes debilitation as you watch the market move against you resulting in great losses. Fear of being wrong or missing out also causes hesitation when faced with an opportunity to buy or sell.
Euphoria will give you a false sense of confidence in the market. Win too many trades too early in your trading carrier and you will no doubt start to load up on future positions that could end up wiping out your entire account if they go against you.
Take time to learn the mechanics of what moves the market. Once you truly understand that there is no way to predict what is going to happen in the market, the fear of being wrong or missing out diminishes.
The reality of trading is that every trade has an uncertain outcome. You don’t need to know what’s going to happen next in order to make money and it takes no skill to enter a winning trade; the key to success is discipline and consistency.
2. To be a consistently profitable trader, you must execute like a robot.
Fear will make you sell (or not buy) the bottom and euphoria will make you buy (or not sell) the top. Whatever your trading strategy or edge, stick to it and remove all emotion from buying or selling. This is also especially true in modern times because you are trading against actual robots.
3. Don’t focus on the money.
Sounds counterproductive, am I right? After all, the whole point of trading is to make money, so how do you ignore it? Focus on winning over time.
Trading is a lot like gambling except as traders, we have an edge, which puts the odds in our favor – you become the casino. Your job is to not focus on each individual trade but rather focus on trade execution, the profits will follow.
Unfortunately, no matter how good of an edge you may have, nothing in the market is certain. Like any casino game, your edge has a set number of odds and you will be wrong from time to time. However, if you stay disciplined you will be profitable over time.
If you follow the golden rule of investing: “don’t put in more money than you are willing to lose,” there should be no fear of losing money because you should consider the money already gone. This is truly accepting the risk.
4. Always use a Stop Loss. Anything else is committing financial suicide.
If you don’t place a stop loss order immediately after entering a position then you haven’t accepted the risk. If your trading platform doesn’t offer a stop loss order option, set a price alert on your favorite service and execute your stop manually.
5. Cut your losses without hesitation.
Don’t look at trading as how much you can make think of it as how much you get to keep. Cutting losses is not always an easy thing to do, especially when prices always go back up right after selling. The problem is that holding in a downtrend, waiting for the price to go up or down a few percent, can easily result in catastrophic losses, which is why it’s important to be very impatient with your loosing trades.
Don’t focus on the money when cutting your losses, this causes hesitation and results in more loss. Consider the loss a cost of doing business in the market and move on to the next trade.
Where to put your stop loss is entirely up to you and is dependent on your trading strategy. When I’m day trading, stop losses are set at the previous swing low.
I rarely allow myself to lose more than 5% before cutting my losses and re-entering at a better price. With long-term holds, I may allow for more loss percentage or even add to my position depending on my analysis of the current market conditions.
6. Know Your Targets.
If you don’t really have an idea of where you want to go then you are just gambling. Which trading strategy to choose is irrelevant in this regard; just know you must have a plan. Knowing your targets means planning your trade before you make it. This requires you to set three parameters: an entry point, a stop loss, and exit.
Learning basic TA strategies like moving averages, trend lines, and support & resistance will help you make a plan for where to buy and sell. Participate in a specific coin market for a long enough time and you will eventually learn relevant price points and gain a “sixth sense” for market cycles.
7. Know Your Strategy. Have a timeframe for your trades in mind.
My rule of thumb when trading goes something like this: The longer the hold, the bigger the stop loss with smaller buys averaged out slowly over time. For short-term trades I will enter with a few large buys and maintain a strict or trailing stop loss. In any case, I have an idea of how long I will be in a trade before cutting my loses or taking profit.
8. Trading is just a numbers game of averages and probabilities.
Moving averages are an amazing thing, study them and learn their significance on various time frames.
9. You will lose more trades than you win. Risk management keeps you profitable.
It’s better to go into every trade thinking it will be a loser rather than it will be a winner. What matters is that your big winning trades far outweigh all of the small losers.
For example, if you constantly take trades with a risk-to-reward ratio of 3:1, you are only risking one dollar for every three dollars of profit potential.
Being a better technical analyst doesn’t make you a better trader. As Mark Douglas says, “Good market analysis can certainly contribute to and play a supporting role in one’s success, but it doesn’t deserve the attention and importance most traders mistakenly attach to it.”
10. Your level of consistency is a direct result of how well you follow your trading rules.
Sticking to your trading rules with no emotional attachment is the key to consistency. Consistency is the key to massive profits.