Thursday, June 29, 2017

An Essential Beginner's Starter-Kit for your Journey into the Cryptocurrency Jungle that is Bitcoin & Altcoins Trading: Overview, Markets, Analysis, Emotions, Psychology, Risk & Strategy

Made a windfall during the recent cryptocurrency bull trend?

Thinking of taking out your student loan to invest long term in Bitcoin, Ethereum, or some other alternative cryptocurrency and blockchain technology?

Considering to quit your day job to be a full time cryptocurrency trader?

Before you take an impulsive step that will drastically change your life for better or worse, take a step back and consider what this actually means, and if you have adequately planned for what you're getting yourself into. Are you sure that you are ready to play the hardest game in the world?

(credits to @Trader_Dante for this piece)


Introduction

Whether you're new to this whole trading game, or if you have some experience trading traditional markets but feel like crypto "is a totally different animal", this post is for you!

If you're just like most new traders, you might not even understand what a "pip" is, or have no clue where to get started in reading and interpreting charts & candlesticks, and everything may look very foreign, daunting and overwhelming at first sight, but fret not!

Cryptocurrency trading is no different from trading traditional markets, and in fact provides a more level playing field with relatively less "smart money" in the game today, and if I may say, "easier" to learn too. Whether or not you have any prior trading experience, this blog post aims to provide you with a starter-pack of essential knowledge and resources to help you learn trading, and to present a framework with which you can approach trading cryptocurrencies and the global markets at large.

Trading and the world of Bitcoin and Altcoins may seem like trying to navigate through a dense jungle at first, but once you learn how to read your compass, have the right lenses on with which to view the markets through, and with the right attitude and propensity to keep trying & improving, you will quickly be able to develop an eye for the market and chart patterns, and begin to make sense of it all.

Indeed it is fact that most professional traders start their career by losing for the first 3, 5 or even 7 years. On the flip side, I assure you that this is no rocket science. With the right strategy, proper risk management and discipline, anyone can make trading profitable, even you! So let's get down to it...



What is a Market?

No matter how you look at it, you became a trader the first day you bought your first Bitcoin, Ethereum, or altcoin, from someone else. Whether you're trading as a hobby, want to make this your full-time career, or simply just dipping your toes into the world of blockchains and cryptographic currencies, I believe it is prudent for you to at least arm yourself with basic trading techniques and price analysis frameworks, since trading is an integral aspect of owning cryptocurrencies that you cannot avoid whether you like it or not.

Before we get into the tutorial proper, let's start off by looking at the markets and trading from a more abstract perspective.

What's the one thing in common between all traded markets, be it stocks, bonds, commodities, or even cryptocurrencies? You may have guessed it, it's none other than the human beings trading it, and it is the emotions of these people that drive prices in the market. By this logic, we can argue that price is the collective representation of human emotions, and hence emotions and psychology are a critical puzzle piece and first step to understanding the rules of the game.



Making Your Own Trader

We all have different styles, from the clothes we wear, to the time we sleep and wake, to the type of diets we have. Similarly with trading, we all have different risk appetite and propensity, schedules, preferences, portfolio size, and it essential for someone getting into trading to first figure out what type of trader you are, to form your own unique understanding of the market, your own perception of how to analyze the market, and your own framework on how to approach the market.

With that said, though there are many different parameters you can tweak to develop your own style, there are several over-arching factors that you need to take care of regardless of your strategy or style, and the path that you have taken.

The rest of this post will cover these key concepts, to give you a baseline for devising your own approach to trading cryptocurrencies like Bitcoin, Ethereum, Zcash, that you can bring along with you everywhere and trade any kind of market all the same.


Understanding Yourself - What Type of Trader Are You?

To begin, let's start with the simple yet effective 5W1H (except the 'when', which isn't all that relevant here) questioning technique, and dig in to understand ourselves better.

First and foremost, WHY do you trade and WHAT do you want to achieve?

Do you want to achieve financial freedom? Make some side income? Have an interest in the technology and wish to invest in it for the long term? Or do you wish to travel the world without being bound to a desk-job?

Whatever the reason, make it clear to yourself and seek the advice and support of your family and friends.

WHO are you? WHEN can you trade?

Do you work a 9-5 job or are you a freelancer? Do you wake up at sunrise and go to bed at sundown, or are you a night owl? What is your schedule like? Do you have a family and kids, or are you single? Are you studying, or working?

I'm sure you already know all this about yourself, but have you also considered these factors in developing your trading style?

WHAT type of trader are you?

Only after figuring out the why, what, who, and when of your trading, can you be able to tailor your strategy to suit your circumstances.

Are you a day trader, swing trader, or position trader? If you're working a full-time job and can't babysit your positions throughout the day, don't attempt to be a day trader trading 15m candles but focus on higher timeframes such as 6h, 12h or 1d candle charts instead!

And the million dollar question, HOW can you devise a profitable trading strategy, suited to who you are, to achieve your goals and live your dreams? Unfortunately, there's no straight answer here, and anyone who tells you otherwise is lying or out to cheat your money. The answer lies in you, to understand yourself, your needs and your goals, in order to create your own unique strategy. But that's not all...

The art of trading is a simple yet seemingly complex task of putting together all the available bits and pieces of information to form a complete picture, in a world of incomplete information. On top of that, it involves 100s if not 1000s of hours of testing setups and strategies, finding your own way to make sense of it all, gaming probabilities, creating a plan and diligently following it, and most importantly, controlling your emotions and learning to apply proper risk management.

Nobody said it was easy, but if you are ready to play the hardest game in the world, I'll try my best to hone you in the basics of the art of trading and to get you started on this adventure.

For a primer on what to look out for as a beginner trader, spend some time to listen to this podcast where Jerry Robinson shares his journey, experience, and growth as a trader, and covers a wide range of diverse topics perfect for beginners, from the importance of having and following a trading plan/system, to the difference between the types of trading styles, to technical and fundamental analysis, emotions, the use of stop losses, and more.


How Do You Trade?

Analyzing markets can involve the use of one of or a combination of numerous methods, such as fundamental analysis, technical analysis, quantitative analysis, based on retail order flow, based on news, or by following other people's tips or "insider information".

Should be obvious but I'll just emphasize anyway, you should NOT be entering a trade based on a gut feeling, or on a coin toss, or worse still based on a "hot tip" from your uncle, colleague, or something you heard on the TV.

Everyone has their own unique style, and the hard truth is that while some of them work, most don't.

Moving forward, we'll break down trading into somewhat modular components and look at what determines a good trade, how you can start winning and be a profitable trader, look at some of the things you can do to avoid the trap of trading based off hot tips, and provide you with the necessary skills and knowledge to approach trading and conduct yourself in the market.


What Determines a "Good Trade"?

1. Trend is your friend

Generally, you should only take trades in the direction of the trend. i.e. only long / buy in a bull market and never try to short it until the trend has shown to reversed.

2. Price

What is price? Price is the representation of a value that market participants are willing to pay for a stock or commodity. (Read: Cost vs Price vs Worth vs Value)

Price should always be taken relative to something else. You are probably familiar with the BTC/USD pair, which represents the value of BTC in terms of USD, as well as the pairs with other fiat currencies. However, do not limit your perception, since price is relative, we can value BTC in terms of other commodities, such as gold (TradingView: BTC/Gold), or even big macs (Bitcoin Purchasing Power Index).

Lastly, 'cheap' and 'expensive' are relative terms. A coin should not be seen as cheap just because it costs 1 satoshi, compared to Bitcoin for example that costs over $2000. Price should be analyzed in relation to it's market cap (supply * price), as well as the perceived value of the company, commodity, or cryptocurrency.

3. Timing

Market timing is an often overlooked yet hugely critical component of a good trade. As some traders would say, "when it comes to trading, timing is everything."

There's no 'good' price without a 'good' timing. You can buy at a 'high' price but at a 'perfect' timing and it'll be a good trade, but if your timing is 'bad', your 'good' price could quickly go against you and end up being a 'bad' or losing trade.

Here's a couple of articles for you to further digest the concept and importance of market timing in trading:

4. Don't chase the market!

To chase or not to chase, that is the question. Well, not really. It is a no brainer to know that chasing price is a sure way to increase your risk, decrease your profit potential and, in time, probably blow your account.

Here are 20 points to always keep in mind about the markets, trends, and prices, to remind yourself not to chase prices: Trading Success - How To Avoid Chasing Stocks.


How To Win At Trading?

If you made some good profits during this recent bull run, now is the perfect time you learn to keep it, and fast.



What most new traders might find perplexing at first is that you don't have to win >50% of your trades to be profitable. There is an important concept called "risk-reward ratio" in trading, that can make you a profitable trader even if only 25% of your trades are winners, by taking only trades with rewards that outweigh the risks by >3x. i.e. you can make 3 losing trades at a loss of $1 each, only make 1 winning trade with a profit of $3, and still end up breaking even.

So back to the question, how can we win? Perhaps to answer this question, we might get some clues by studying how people lose. People lose in two ways, by being impatient and getting into trades at the wrong time, or by being patient at the wrong time and holding on to a losing trade longer than they should. Don't be that guy.



Cut Your Losses Short and Let Your Winners Run

One of the most enduring sayings on Wall Street is "cut your losses short and let your winners run." Sage advice, but many investors still appear to do the opposite, selling stocks after a small gain only to watch them head higher, or holding a stock with a small loss, only to see it worsen.
(Source: The Art Of Cutting Your Losses)

It may be a little counter-intuitive at first, but the path to winning lies simply in managing your losses. As the saying goes, "take care of your losses and your profits will take care of itself".

Articles on this topic:


Using Stop Losses

For most professional traders, stop-losses are an integral part of any trading system, especially as you start to automate strategies. Be it the scalper looking to buy a high momentum breakout, or a position trader getting in at the accumulation phase, professional traders plan their exits (both take-profit, and stop-loss levels) before even entering a position.

The benefits of having a stop loss include:
  • Preventing you from blowing up your trading account
  • Limiting your losses
  • Living to “fight” another day

However, in crypto, and especially in the less mature markets, you may find it close to impossible in low liquidity markets to use stop-losses without running the risk of losing your entire accumulated position due to one careless wick. It is still advisable to use stop-losses especially when swing or day trading more liquid markets (e.g. 1000 btc daily volume or more), or at least have a plan and perhaps alerts set up to tell you when you should get out of your trade if you don't physically have a stop-loss order in place. Knowing exactly where to place your stop loss will take time & practice to hone, and there's no better way to learn than to actually get trading.

Regardless, the concept of booking profits by moving stop-losses up, like a trailing stop-loss, should always be exercised to protect your profits during big trends and at the same time keep your draw-downs low.

Some readings on this topic:


Analysis Methods

If trading is new to you, something basic like reading the chart might be a little confusing at first. However like I said, this is no rocket science. Learn more about the basics of reading a chart, meaning of trading terms, and other technical analysis tools and patterns to help in your analysis, with resources such as my other blog posts, investopedia.com or babypips.com.

Trading analysis methods usually fall into two distinct categories; Technical Analysis (TA) or Fundamental Analysis (FA). You can find out more about the differences between fundamental and technical analysis by reading this Investopedia article here and this writeup on diffen.com.

Fundamental Analysis refers to the study of the merits of the company behind a stock, typically by looking at a company's earnings, earnings per share, revenue, profit, growth, return on equity, and etc. Or in the case of cryptocurrencies, FA would include factors such as the project's technology and product, the strength of the development team, support from the community, and etc.

Technical Analysis, on the other hand, involves the study of price action, looking for structure, cycles, patterns and setups based on price data and probabilities. TA is more of an art than a science. It is a science in that there are probabilities and quantitative data to analyze, but with people involved, it becomes a social science. As pointed out above, markets are traded by people, and people are irrational. Though chart patterns have probabilities of success and failure, it is ultimately decided by the market's participants and governed by their emotions, and hence TA is unable to 'predict' the precise price or timing of a move due to the multitude of factors that affect each other in a web, and where the action of one man can change everything.


Most traders use a combination of both, in some manner not very different from this: Use FA to sort out the stocks that you'll actually put money into, while using TA predominantly to find entry point, to filter the stocks picked by FA, figure out which one is the right one to enter, right now. You may have a universe of great stocks, but knowing WHEN to buy them, is the key if you're a trader.

Although FA gives you an idea of which stock is a good buy, it gives zero clue on the timing of entry for the trade. It is prudent to note that not only does FA not consider stop losses, it tends to go completely against stop loss strategies by encouraging one to add to a losing position, when price decreases while the fundamentals (e.g. P/E ratio) of the company remains the same. Whereas for TA, the concept of stop-losses and cutting losses short is imbued into most all strategies, and as mentioned is a key to preventing you from blowing your accounts.



Trading Strategy, Plan and Ruleset

According to Wikipedia, a trading strategy is a fixed plan that is designed to achieve a profitable return by going long or short in markets.

Would you drive a car on the road without understanding the road rules? ​I'm guessing you probably wouldn't, unless you wanted to dramatically increase the chances of a crash. So why is it that we still see so many new traders, rushing into the markets with no trading rules in place? Laziness, ignorance? Who knows, but one thing is certain... if you trade without any rule based trading strategies in place, then you are positioning yourself for disaster.

It may be difficult to even know where to start at first, and it will take some time looking at charts, trying out various indicators, before you can get some idea of what may or may not work. From there, find some potentially profitable setups, and add parameters to your ruleset for entering and exiting a position.

Besides the technical ruleset for the execution of trades itself, you should also seek to incorporate portfolio management considerations into your strategy. This could include things like your goals, a plan to manage risk, trade size, maintaining a trade journal, or even an exercise or diet regime to keep your mind sharp.

By fixing your trading plan before taking any positions, and strictly following your plan and the rules you set in place, you should be able to better handle your emotions, as you trade based on quantifiable targets instead of relying on guesswork and being lost without any predetermined targets or exit plan.


There's a reason why 3 out of 5 of these relate to managing your losses and risk, and we'll explain that in greater detail later. Here's some readings about forming a trading plan and how to go about creating rules for your trading strategy:




Emotions & Trader Psychology

You may have heard the saying, that when your neighbour (or mother) starts buying, you know it's almost time to sell. This is true because trading is a zero-sum game, meaning that for every seller there is a buyer, for every winner there is a loser. In addition, information is more valuable the less people have it. The idea is that if "dumb money", or the mom-and-pop investor, is buying and yell that it is going to be the next best thing and will make him rich, it should be time for you to sell.

Again, such emotional tells work in a market, based on our assumption that human emotions and trader psychology are drivers of prices, and critical components or puzzle pieces in understanding how this game works. Other than your neighbour or mom buying, other tell-tale signs include even things like tattoos.




When people start getting overconfident or complacent, to the point where they get so deeply and emotionally attached to the stock/coin, you should take a step back and realize that euphoria is kicking in and the top may be near or already in. Examples would be people talking about buying lambos, mansions, yachts, or calling the investment a "store of value", "long term investment" after a 10x rise in price, or saying things like "i just need to hold for 1 year and i'll be rich".

"I think ripple is becoming a store of value"
"I think ripple is becoming a store of value"

Contrarian investing is epitomized by Baron Rothchild's quote, "the time to buy is when there's blood in the streets." The name of the game here, keeping the emotional crash cycle in mind, would be to buy the fear, and sell the greed. Burn this chart into your mind, because it is the single most important concept you need to know about markets and trends, in order to get the big picture and make sense of it all.


Watch the video below by @cryptopicasso who explains succinctly why and how this cycle is relevant to all of trading. If you like the video, you can subscribe to his webinar tutorial package for 0.5 BTC. Make sure to mention that you were referred by @onemanatatime, to enjoy $100 off your subscription fee.







To delve deep into trader psychology, listen to this interview with Mark Douglas, author of "Trading in the Zone", where he discusses trading psychology and risk management, as well as another podcast, How to master trading psychology with Brett Steenbarger by @chatwithtraders.





Risk & Trade Size Management

Risk Management is undoubtedly the #1 most underrated trading philosophy, and also the most disregarded by new traders, who incidentally continue to blow up their accounts until they fix this.

You can have the best strategy with insanely high gains, but if you are risking 20% or 50% on every trade, or if you cannot keep your draw-downs low, it is a risk management disaster and is not a good trading strategy! As a guide, in traditional markets, profitable ETFs and hedge funds look for draw-downs of no more than 7-10% per month, averaging about 10-20% or more profits per year.

Rule number one of trading is you want to let your winners run, and cut your losses short. And back to our earlier point that if you manage your losses, your profits will take care of themselves. Sure, crypto is a different animal altogether, and your profits could be in the 100s or 1000s of %, but if you don't cut your losses to aggressively protect your bottom line and drawdowns, it'll only be a matter of time before you blow your account.

In terms of trade size management - never go all in on one trade! Set rules so that you risk only 2% (or 5%, or 10%, or more depending on your risk appetite) of your portfolio in a single trade. And lastly, don't overtrade!



Some platforms offer up to 100x or even 500x leverage. With margin trading, small moves in price in the wrong direction can wipe you account (Read: Margin Call) if you're overleveraged or trading too big a position than you can afford.

Friendly piece of advice, don't use more than 10x leverage, or even 3x for that matter, especially if you are not familiar with Margin Trading!


Your Attitude

Your attitude is everything, not just in trading, but also in life. So let me just leave you with a couple of last points and my personal thoughts about the attitude of a good trader:

1. Don't think you're better than anyone else, or that you know it all. Be humble!


2. Be open to new ideas that may not necessarily agree with yours. Be objective with all kinds of information, remove bias and emotions when analyzing a chart.


3. Must have a passion to learn and to improve yourself.

4. Never give up!


I hope this post has given you the essential knowledge to find your way around in this cryptocurrency trading jungle, and has provided you with some practical insight into starting your own trading journey, and how to go about approaching trading and analyzing markets. Will go in depth into technical analysis in one of my next posts, but for now, let me just leave you with this...

The name of the game is survival -- STAY ALIVE! 



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