The main principles of crypt trading - 14 tips on trading the crypto currency
This material will consider the main principles of crypto trading. In addition, readers will familiarize themselves with such important concepts as "diversification" and "liquidity", as well as learn what the expression "Buy by hearsay, sell by facts" means.
There will also be a glossary at the end of the article with the terms and slang expressions used in the material.
Before you learn a few "universal" technical indicators as soon as possible and choose a popular cryptobox (you can do it with a trollbox, but it's better without it), you should once and for all learn some key principles of trading on the cryptocurrency market.
The list below is, of course, not exhaustive. However, these principles will suffice to begin with, because experience comes with time.
It is better to start trading in cryptocurrency only with free funds.
The main part of cryptocurrency savings is better to store not at a centralized exchange, but in a reliable wallet. These funds can be considered as long-term investments. At the same time, assets frozen on a crypto wallet can mean a lost short or medium-term profit for a trader because they are not involved in turnover. Thus, some of these funds can still be put into several cryptocurrency exchanges.
Do not enter into a "whole cutlet" transaction - for beginners it is quite safe to practice small trades, each of which can be limited to, say, 1-2 percent of the deposit. Gradually, with the acquisition of skills and confidence, this limit can be raised a little. If you can't wait to get a higher percentage of the deposit, it's better to wait for the most favorable moment - for example, a good correction in the price of the asset.
In no case do not go to the bank for a loan to buy cryptocurrency and "play" on the exchange. Do not listen to different well-wishers, telling how they managed to "make 100500%" and quickly pay off the bank! It is much better and safer to put a part of your free funds on deposit from time to time.
For example, calculate your personal budget so that, say, 5-10% of your monthly income would be spent on buying cryptocurrency to refill your deposit at the cryptographic exchange. Over time, you will also be able to increase your deposit by gradually recapitalizing profits.
Don't be afraid of losing your free funds.
- First, you have allocated an insignificant part of your savings for trading, haven't you?
- Secondly, even the best and most experienced traders are sometimes wrong.
Losses (and they can happen due to different reasons: stock exchange scams, hacker attacks, token delisting, loss of private keys to the account on a decentralized platform, etc.) and long drawdowns should be taken as risks with high probability. In addition, they learn from mistakes.
If success had not been replaced by failure, it probably would not have been so interesting. As before, the cryptocurrency market is extremely volatile and, one might even say, unpredictable. The cryptocurrency capitalization depends heavily on various fundamental factors that have an immediate impact on the mood of market participants. Important and not so much news from the crypto industry can quickly "multiply by zero" even the layouts of the most experienced traders.
Hypothesis of an effective market is good, but you should also carefully analyze the fundamental factors (we will talk about them in the following materials). Be prepared for the fact that someday you will buy "on High" overvalued altcoin, and then you will wait for months until its price is close to the previous levels, at least to "break even".
The same bitcoin does not grow infinitely, and there are quite deep drawdowns. For example, immediately after the collapse of Mt. Gox, the first cryptocurrency went into a protracted correction, which stayed for about two years. In the chart below, you can see how soon after reaching values above $1000, the price began to fall rapidly.
Then, after the complete stop of trading in February 2014, the price decline accelerated even more. The recession lasted for about two years, with a strong recovery starting in 2016. Those who turned out to be more patient and stronger in spirit than the others, got a good profit in a very successful year for cryptocurrency 2017.
Those who sold bitcoins at the end of last year for $19,000, and then bought them back a few months later for $6,000, were most likely satisfied with their investment performance. Thus, at the time of writing, bitcoins are traded above $8,000. Similar situations occurred with "digital silver," the cryptocurrency of zap coin, and other assets. Trade with real money. Books, training courses and seminars will do little good without practice.
Do not keep your eggs in one basket
This simple, effective and at the same time fundamental principle of risk management is called diversification. Distribution of risks through the use of different assets, wallets and trading platforms stabilizes the profitability of the cryptocurrency portfolio and protects against loss of everything at once. Thus, one should not focus on one "super fashionable" cryptocurrency exchange. Each of them has its advantages and disadvantages, as well as its own set of coins in the listing.
For example, Poloniex has a simple, intuitive interface and quite a rich range of alto coins. Bitfinex has more advanced analytics and charts from TradingView, but interaction with this exchange can cause difficulties for novice traders.
Also, one should not focus on a single digital currency, no matter what growth dynamics it shows. Don't forget: diversification not only reduces risks, but can also increase return on investment.
Buy cheaper and sell more expensive
When people come to the regular food market, they try to buy vegetables of acceptable quality at a relatively cheap price. Most people do not buy the most expensive products in the market without paying attention to their freshness and quality. Getting to the exchange, many beginners of trading do the opposite.
When you see a chart of a rapidly growing asset, many people try to "jump in the last car of the leaving train", whatever it takes. At the same time, they often do not even think about the fact that after growth there is always a decline, and vice versa.
In most cases, after buying on hyah, the beginning trader will be disappointed - the price begins to fall sharply. Rapid growth is fraught with a strong decline in the asset price. An exception for opening a deal can be if, for example, the strategy involves trading on a breakout level.
However, it is best for beginners to follow a simple principle - "bought cheaper, sold more expensive". Even if you follow only this rule and adhere to basic principles of risk management, you can get more or less stable profits.
John Rockefeller said in due time: "Buy when there is blood on the streets. Many buy and sell, looking at the crowd and reading the trolley box.
A successful trader should not follow the crowd, but against it, selling the asset when the majority of not very experienced players are experiencing euphoria and continue to make purchases. Buying is better when the hamsters are just beginning to feel excruciating annoyance. In other words, always buy from pessimists, and sell to optimists.
Choose liquid cryptocurrencies
Many investors recommend taking a significant part of the cryptoportal for bitcoin. This is not just a tribute to the first cryptocurrency - there is a certain logic to it. First, bitcoin is the least volatile, steadily growing cryptoactive. In other words, the first cryptovolta usually has a higher Sharp coefficient than most altcoines.
Second, many altcoins often lose their price over time (especially in relation to bitcoin). To date, the statement that the bitcoin "crazy volatility" has somewhat lost its former relevance.
Thus, at the end of last year, the daily volatility of Bitcoin for some time was comparable to the magnitude of fluctuations in oil prices and was lower than Twitter shares.
In the next graph, you can see that as demand for bitcoin grows, infrastructure develops and its prices rise, the volatility of the crypto currency also decreases. It is now much lower than it was a few years ago, and its 30-day average rarely exceeds 5%:
To make sure that Bitcoin's price volatility is relatively low, we can compare it to liquid altokines, including Litecoin and Ethereum (ETH). In addition, according to CME Group CEO Terry Duffy, the integration of cryptocurrencies with the traditional financial market will help reduce their volatility. Another argument in favor of highly liquid cryptocurrencies is the fact that they are less exposed to the risk of scam.
Behind the top altokines, for example, there is usually a serious development team. They are also more likely to be listed by the largest cryptoexchanges, which pay attention, in particular, to capitalization, transaction volume, project reputation, etc. Liquid altcoins attract crypto-investors from all over the world at least because they are at the top of the ratings, such as Coinmarketcap, and therefore more often than other crypto-investors are seen by everyone.
Altcoins with high capitalization and large trading volumes are much less at risk of delisting and have relatively low volatility. Among other things, cryptocurrencies such as Ethereum, DASH, Litecoin, etc., support many multicurrency crypto wallets, which means that traders do not have to think long about where to take profit from trading (or in time to "roll up the fishing rods" in case of a threat of scam exchanger).
It's much better and even nicer to trade with something you know about and the success of which you have the least doubts. The coin of the project, which is being actively and fruitfully worked on, is less inherent in the risk of a sharp dump.
Don't believe anyone who says that $100 is enough to get rich on the stock exchange.
The bigger the deposit, the more opportunities you have to implement effective risk management. In other words, the less percent of the deposit falls on each individual order, the less the risk of capital drain. Thus, if you have at least several thousand dollars in your account, you can place not 1-2, but a dozen orders on different currency pairs at once, without risking all the funds.
You can also place several orders from different levels on the same currency pair. Of course, you can guess the price movement of a coin of $100 at the very bottom of the currency pair.
After a while you can get $1000, and even make x20.
On the other hand, with an unfavorable outcome of events and a sharp dump, the amount of $100 can quickly fade away. As mentioned earlier, you shouldn't go va-bank and bet everything on some single "hip" cryptoactive.
It is better to gradually capitalize profits from small deals and increase your trading account. When the capital grows to a decent amount, the same 1-2% of the deposit, with "conservative" 10-30% of the profit from the transaction will bring each time already tangible income.
If you have only $100, don't be in a hurry to start trading - save some more, or just put it "for the long term" in bitcoin. At the exchange, try not only to multiply "money with money", but also just save what you have.
More trades - more profit
This point largely overlaps with the previous one. Do not bet everything on one coin, trade multiple crypto assets. If the profit on small orders is insensible, don't worry, it will be a useful training. If you really want to motivate yourself to be the first to take advantage of trading, trade in several pairs, trying to make small but profitable deals more often. This way, with a small capital, you will increase the turnover of funds and it will have a positive impact on your financial results.
Capital movements are sometimes more important than their size. Trade on large timeframes At least choose large timeframes at first.
A weekly timeframe can be used to review the general trend and trading volume dynamics (Volume indicator). The daily and four hour charts give a good overview of support and resistance levels. Hour, 30 and 15-minute timeframes can be used to enter a deal more or less accurately.
For example, the daily chart of ETH/USD shows quite well the level around $412 from the June high.
At the beginning of December 2017, the price of "ether" bounces off this level, which serves as support. Traders call this price movement "around the corner" a "trade". In this case, you can carefully place a buy limit order at this level, as it is likely that the price will return to this level once again and then continue the upward trend.
The question arises: why shouldn't beginners be fond of small timeframes, as they can make a profit almost every 10-20 minutes? The answer is simple - high risk. Thus, cryptocurrencies are very volatile and on a small timeframe everything can change very quickly, and not for the best for the trader.
Pay attention to the chart of the same currency pair, but on a 15-minute timeframe:
Here you can see much less clearly the levels, the frequency of sharp upward movements, which are replaced by small plums.
Most candlesticks have long shadows. There is a lot of market noise that makes it difficult to make decisions. The intensity of the market noise is inversely proportional to the timeframe value. In other words, the longer the time frame, the smoother the price movement looks. On the daily chart, on the other hand, price candlesticks look much smoother, and this allows the player to better navigate the market situation.
Thus, on large timeframes, it is easier to choose strong levels on which to rely more or less confidently when making decisions about entering a deal and taking profits. On the other hand, on small timeframes, there is a lot of market noise and the levels are not so well traced.
Small-timeframe traders often rely entirely on technical indicators, but this is not a good start for a beginner. The indicator is just an auxiliary tool, which is not without its disadvantages. Moreover, they are often late with their values, providing a bearish service to the trader.
Buy by ear, sell by fact
The rumors may contain both important (or even leaked insider) information and misinformation known to be false. Usually, when an important rumor appears on the market, a new wave of information is created that is powerful and fast enough to form a strong trend. There is a stereotype that the principle of "buy by ear, sell by fact" is guided only by outdated speculators. This is not quite true: many investors also often use rumors, but in most cases they identify them with forecasts.
A rumor or forecast is not important for someone who knows how to analyze market information by screening out unnecessary information. Up-to-date information may be of benefit to a determined, thrifty and rational-thinking trader.
On the other hand, there are a lot of information sources on the Internet. Therefore, the cornerstone of information processing is trust in its source. The latter is based on the authority of the source and its time-testedness. It is not bad if the information is confirmed by at least three similar news from alternative, but trustworthy sources.
On the other hand, often the release of news in major publications should be regarded as a signal to exit a position that has already been worked out by the market. Anyway, Twitter accounts of cryptocurrency projects, press releases on official websites of companies, foreign sources such as Bloomberg, Reuters, CNBC, etc. can serve as indispensable helpers to the trader.
Also very useful is the calendar of events in the crypto industry. Below is an illustration of the wave formed by the appearance of positive hearing (for negative hearing the graph will be mirrored relative to the X-axis): Such a wave usually consists of four phases: the appearance of hearing; growth in expectations; the appearance of supporting news, profit taking; equilibrium price setting (correction).
There may seem to be a paradoxical situation - good news has come out and crypto assets are falling rapidly in price. It means that a large circle of faces already has information and all the cream has been removed. The main task of an investor in this strategy is to have time to open a deal closer to the first point to maximize his profit at the end of the hype.
At the same time, it should be remembered that the strength of the trend is proportional to the number of recipients of hearing. The risks of this strategy are that it is possible not to guess with the trend, not to get confirmation of hearing, or simply miss the first and third phases of the wave. There is also a great risk to mix up the wave phases. For example, it may seem that it is not too late to follow the trend, but in fact the market is about to start selling out. When rumors turn out to be false, then blindly following them can lead to significant losses. At the first signs of unwillingness of the market to trust the rumors more, you should stop following this strategy.
Do not reinvest all profits
Trading is a job, and labor should be rewarded. Revenue is the best motivator for productive work.
Therefore, in order to make trading a fun activity and always have a desire to learn something new, try a new strategy or a new indicator, part of the profit should be periodically brought to the fiat and spend on pleasant things for yourself.
Do not capitalize all profits, but only a certain part of them.
If money does not bring pleasure, the process itself can quickly become boring, especially at the first failure. In business, the most important thing is profit, not the process itself, no matter how exciting it may be. Get your profit!
Don't regret the lost profit
If you closed a deal, fixing 20-30% of profit, while your friend "made x10" - don't regret it and don't envy it! Those who come "for the whole cutlet", absolutely do not follow the principles of risk management. Such traders could very likely have made x10, but only in the opposite direction (for example, if they entered the deal late, just before the trend reversal). Trading is not a scheme of fast enrichment. It is a job, not a game. A trader should fight his own greed and get used to the fact that the profit from the opened orders should be planned in advance. In any case, avoid the loss of profit syndrome (FOMO) and do not go for social network advisors.
Do not trade with leverage
At least do not resort to margin trading in cryptocurrencies at first. Bitcoins are still volatile and altcoines are even more vulnerable to strong price fluctuations.
That's why the cryptocurrency market attracts so many people - due to the high volatility, you can quickly make a significant profit, and without using borrowed funds, as well as related fees and risks. Trading cryptocurrencies on margin carries enormous risks. The essence of such trading is that the trader borrows capital at a certain percentage to increase his leverage.
The wrong decision can lead to significant losses - if the price moves in an unfavorable direction, the platform will first ask to increase the collateral, and then liquidate the order with fixing significant losses for the trader. The role and the interest rate on borrowed funds play - these fees are automatically removed at the moment of closing the position.
Due to the lack of liquidity in the market, candlesticks on the chart of the cryptocurrency "marginator" are often replete with long shadows. Each of these shadows is a potential fast profit or margin call. It is up to you to decide whether the game of candlesticks is worth it. Leverage in the hands of a layman can lead to catastrophic consequences. It is very dangerous to use this instrument in conditions of price instability or when trading low liquid coins.
Plan trades ahead
Before trading, try to mark for yourself the levels at which you will close a position, fixing profit (or loss if you trade with leverage). This will help you stay in trading longer, even with unwanted financial results. If you have made 2 or 3 consecutive trades at a loss, take a walk, because a negative financial result indicates that something has gone wrong. In such cases it wouldn't hurt to refresh your head to understand what was done wrong.
Accumulate knowledge gradually
Do not get carried away from the beginning with a lot of sophisticated indicators and a lot of trading strategies. At the beginning, you should learn the basics of trading and risk management, several graphical figures and the most popular indicators (for example, moving averages, MACD, Stochastic, RSI, Bollinger Bands), as well as the settings of the latter. You should also learn to see the levels, build price channels and understand the main figures from Japanese candlesticks.
You should not think that minimal knowledge of technical analysis will quickly pave the way to the Holy Grail. TA is just a tool, a kind of superstructure that complements the fundamental analysis. Craftsmanship comes with practice. Overloading theory with no practice will only cause a mess in your head and disappointment with trading. Conclusion: Don't make it harder!
Trollbox article is a mini chat that can still be found in the interface of various cryptographic exchanges. It is strongly discouraged to read the entries in a Trollbox, as they are full of misleading messages. For example, often, when the market is already overheated and it's time to close long positions, in a mini chat you hear calls in the spirit of "Buy, you fools!
- Delisting - exclusion of assets from the list of exchange trading pairs. Delisting can happen due to various reasons: low liquidity, regulatory risks, developers' failures, etc. Hamster is a newcomer to trading. He usually goes to the crowd, often reads the trollbox and is guided by trading signals from Telegram Chats.
- Hamsters are often bought on high with all the consequences. As soon as the market starts selling, they often drain the asset at a drop price, and then feel psychological discomfort. Japanese candlesticks are a popular way for traders to display the price on a chart. More information about Japanese candlesticks and popular shapes based on them will be given in a separate material.
- Shadows of candlesticks. Japanese candlesticks consist of bodies and shadows. The first ones show the difference between opening and closing prices, while the shadows show price highs and lows. The indicator is a class of indicators calculated on the basis of historical data of asset price dynamics. Technical indicators are used to predict future prices of assets or simply their directions (trends) based on their past behavior.
- Volatility - a measure of uncertainty or risk relative to the value of changes in the price of an asset. A high level of volatility means that the price of an asset can change significantly within a short period of time. Thus, the higher the volatility, the higher the risk.
- Liquidity - the ability of assets to be quickly sold at a price close to market. Liquidity of an asset can be indirectly characterized by a large number of purchase and sale transactions on the market. Thus, assets that can be quickly and easily bought or sold are considered liquid. It is safer for an investor to invest in liquid assets than in illiquid assets as it is easier to transform the first assets into cash.
- Diversification is a method of risk management, the essence of which is to form an investment portfolio of a large number of diverse assets. Portfolio, which includes different assets, can potentially bring higher income with less risk.
- Fundamental analysis - actions aimed at studying various qualitative and quantitative factors that affect the price of an asset (most often in the medium and long term) using financial statements, macroeconomic indicators, statistics, etc.
- Profit - profit.
- Dump, drain - a sharp drop in the price.
- Order, order - order to execute a trade operation. There are various types of orders at modern exchanges (they will be discussed in the following materials of the special project).
- Technical Indicator - a class of indicators calculated based on historical data of asset price dynamics. Technical indicators are used to predict future prices of assets or simply their directions (trends), based on their past behavior.
- Margin Trading (Trading with Leverage) - carrying out trading operations using funds provided on credit against a certain amount, which is called margin. Trading with margin carries an increased level of risk as it increases both potential gains and losses. A scam is usually the sudden closure of a project or exchange on the background of (or shortly after) the termination of obligations to investors.