To become a profitable digital currency trader, you need to do so much more than simply plan your trades; trade your plans or minimise losses. In order to increase your odds of succeeding in the highly volatile crypto markets, you need to start by understanding the fundamentals of trading and specifically trading digital assets. For example, it’s common knowledge that as a cryptocurrency trader or investor one must almost always aim to buy low and sell high or sometimes even buy high and sell higher. However, this is easier said than done. Timing the markets is no easy feat.
There’s a lot that comes with trading including fundamental and technical analysis, risk management, and other profit maximising and risk reducing trading strategies and techniques. In this piece, we’ll cover just three simple things you can do to increase your chances of having success trading or investing in cryptocurrencies.
1) Have Clear Objectives, Goals or Targets
Building a profitable cryptocurrency portfolio requires a trader to have well-defined goals. As a crypto trader, it’s important to define your investment time horizon. This means that if you’re not planning on retiring in the near future, you may want to have a portfolio that includes longer-term investments. For that reason, you should always ensure that the type of trading you choose to do complements the goals you wish to realise and is aligned with reinforcing trading principles such as – in this case – taking long positions on assets that your analysis shows have long-term potential even though realising gains can be protracted.
If your goals are longer-term, you may also want to, for instance, analyse the market cycle and asset performance and how that relates to the utility or use case of the crypto asset, the supply & demand mechanics, the blockchain ecosystem on which that tokenized digital asset is issued and its development. Furthermore, you also want to understand how those variables are factored into the price value of the asset you’re targeting for accumulation.
Assuming that you want to buy the bottom, then it’s probably wise to set your buy orders to execute when the token price is at historical lows and then hodl those crypto tokens until such a time that the asset begins to appreciate in value or the market gathers momentum in an upward trajectory before selling. When the market is bullish or the token price is approaching or reaches new all-time highs, you systematically sell off as the price rises in order to dispose of the asset as the market tops.
Ultimately, your investing approach is what informs how you choose to trade the market and the strategy you employ whether that’s Scalping, Force, or Inversion strategies in day trading for example. Therefore, it’s important to have clarity of purpose and vision. When Charlie Munger, who is indeed a great investor, even though he is not a fan of digital currencies was asked why people can’t think clearly about investing or decisions in their lives in general – his response was “We don’t think a lot about sex and gambling either. The standard human condition is a lot of miscognition. To address this you can “take advantage of other people and improve your own life by eliminating your miscognitions.”
2) Determine your risk tolerance
When trading cryptocurrencies, it’s necessary to establish the levels of risk you’re willing to take. You need to figure out your risk comfort level relative to what you can afford. In general, the longer you have to invest, the bigger risk you can take. Also different types of trading styles present different levels of risk. Leverage trading for instance, is considered high risk trading. Nonetheless, without risk, markets become predictable and value creation becomes difficult if the risk factor is eliminated since risk plays a crucial role in assigning the value of an asset. In order to appropriately gauge your risk tolerance as an investor in the digital currency market, you have to have a good understanding of the broad spectrum of risks inherent in the market. Some of the risks associated with trading cryptocurrencies include:
- Government interference or regulation
- Hacks and scams
- Market manipulation by crypto whales
These and other risk factors play a pivotal role in shaping the dynamics of the market. In order to protect your capital, you need to know when to take profit and how to set up stop loss orders, utilise a trailing stop loss or trailing take profit. These tools are essential for protecting your capital, limiting your losses and increasing your gains. Ultimately, it’s important to fully understand cryptocurrency trading risks.
3) Practice – Doesn’t Make You Perfect, But It Gives You An Advantage
The savvy trader today does not necessarily have to learn everything from experience as far as the dos and don’ts of crypto trading or investing. There’s always that heuristic element which inevitably comes with trading and investing practice, but with so many technologies at our disposal, there’s no reason why as a novice trader you should not at the very least test your trading ideas before risking real money by jumping straight into executing live trades.
Many platforms such as Bybit, BitMex, BitMart and eToro offer prospective traders the tools to practice their trading strategies by backtesting, which allows you the trader, to simulate your trading strategy utilising historical data to generate results and analyze risk and profitability before risking your actual capital.
NB: This content is for informational purposes only. You should not take any information provided here as investment, financial, or other advice.