Trading cryptocurrency or any derivatives is a probabilistic activity that can make you rich or poor quickly. Nothing is guaranteed.
In the business, you will get punished(lose money) for everything; whether you’re making good decisions, being disciplined, being profitable, being confident, or not. You will still get punished. Losing money is part of the business.
And from my over 2 years experience in trading, the most important thing is constant Risk Management. So in this article, I will share with you the 9 tips you can use to manage risk and trade Cryptocurrency profitably.
9 Tips To Become A Successful Crypto Trader
1. Know the difference between trading and investing
It’s appalling that a lot of people venture into the cryptocurrency space without prior knowledge of what they’re going into. Some don’t even know the difference between investing and trading crypto, anyway I will save them time by defining it below:
Investing is simply buying an asset or security at a relatively cheap price and selling it at a premium or higher price over a long period of time(let’s say 1 to 5 years).
Trading on the contrary requires buying or selling a security or asset and expecting to profit from price fluctuations
over a short period of time.
From experience, it is easier to make money investing than trading because things get to fall in place over a long period of time if you buy a valuable asset at a relatively cheap price.
Trading is much riskier because there’s no guaranteed return on investment in the short run. Even though you make the right decision, a single market participant can nullify the trend.
Having known that, you need to ensure you allocate your capital wisely.
2. Capital Allocation
This is simply how you allocate your hard-earned money for investing and trading purposes.
Since investing is safer and much easier, you need to allocate more capital to it. And since trading is much riskier and less predictable, it’s advisable to use a lower amount of money for trading.
Benjamin Graham (Warren Buffet’s mentor) in his book “The intelligent investor,” advise speculators to allocate capital between investing and trading in the ratio 70:30. So if you have $1000 as available capital:
- $700 will be set aside for investing. And you invest it using a technique called Dollar Cost Averaging. That is you buy gradually every week or month over a long period of time and hold it(don’t sell) for years. A better way to do this is to not buy with all your capital at once, instead, you will buy regularly on days or weeks that price falls. That way you will average out.
- $300 will be used for placing short-term trades which are often not predictable.
3. Separate your trading capital from investing capital
After allocating 70% of your available capital to investing and 30% to trading, you need to complete the process by separating your capital.
Take your investment capital off the cryptocurrency exchange (eg Binance: largest Cryptocurrency exchange in the world) and only leave your trading capital on it. This is very important don’t underestimate it.
I will reiterate, don’t store your investment capital on a cryptocurrency exchange. Most times when trading goes south, you can become emotional and easily take your Cryptocurrency investment and place trade that is usually not well analyzed and calculated.
To avoid the gambler mentality that can even set in when you’re making a profit, lock your investment capital on Binance fixed savings or take it off the exchange completely.
4. Have a specific number of trades you will place in a month and stick to it.
Trading is more like walking on a diamond mine or digging a well. You don’t just start digging a spot without prior analysis and investigation. You need to carry out the test and make sure you’re digging a spot that you will easily strike a large quantity of diamond or water without much stress. You don’t want to just dig deep down and get stuck at a rock. That’s exactly what trading is.
Another good analogy of a trader is comparing a sniper and artillery in the war front. Artillery waste thousands of bullet and achieve a little strike rate(average of 50 bullets to a kill) when compared with a sniper who has a higher strike rate(1.5 bullets to a kill).
As a trader, you want to be a sniper waiting patiently for the market to show you a good risk to reward opportunity, then you strike. You’re now like a hunter with a loaded gun who sees a single deer but decided to wait patiently till the group of dear gets to him before taking his shot. That way he would most likely get a kill(a good risk to reward trade).
I currently take a maximum of 10 trades in a month and as a result, I need to wait patiently for high probability trades. If I hurry and place trades with little rewards, I will end up not being able to place high probability trade as I can’t exceed 10 trade for the month.
This method also protects me from losses as I don’t trade anyhow.
5. Only trade with a maximum of 10x leverage
Most traders with little capital will use leverage for margin and futures trading. If at all you will use leverage, ensure that it doesn’t exceed 10x leverage.
Leverage does not make you profitable instead it multiplies your profit and loss by the leverage amount. If you’re winning you make more money and if you’re losing you lose more money. Hence use leverage wisely. Do not exceed 10x leverage.
- 5x leverage means you will lose your capital if the crypto price goes against you by 20%
- 10x leverage means you will lose your capital if the cryptocurrency price goes against you by 10%
- 20x leverage means if you will lose your capital if the cryptocurrency price goes against you by 5%.
Since the cryptocurrency market has daily average volatility of 5%, it’s advisable to stick with lesser than 10x leverage.
6. Use proper position sizing
Your position size is the amount you risk per trade, and a generally accepted standard by most expert traders is to risk not more than 5% on a single trade.
You shouldn’t be the one that uses all your capital on a single trade and lose it all. You must spread it across many trades and accumulate your profit over time.
- Using 5% of your capital on a single trade would allow you to place over 20 consecutive losing trades before you lose your entire balance.
- Using 2% on all single trade will enable you to place over 50 consecutive losing trades before you lose all your capital.
- Using a 1% position size on a single trade will enable you to place over 260 consecutive losing trade before you lose all your capital.
Using this technique coupled with waiting patiently for a good risk to reward trade will enable you to compound your profit over time.
7. Use tight stop loss
When you enter a trade with good risk to reward, it’s important you use tight stop loss (especially when using leverage, like in futures trading). That way you can easily get out of the trade with little loss if it didn’t go as planned.
Stop loss must be placed immediately when you enter a trade(when you have a sound mind) and before wins or losses blindfold you from making good decisions.
I have seen people who because they don’t want to set stop loss and take small losses end up taking a very big loss or losing all their capital.
So be smart enough to use stop loss to take small losses and get out of the trade before things get worse. That’s what stop-loss is made for.
Putting a stop loss in place is like having your fire extinguisher in your car, you just don’t know when things will go pretty worse.
8. Have a take profit target and withdraw your profit regularly
There’s this mentality in the cryptocurrency market where people think prices will just keep rising up. This very wrong. You must have a reasonable take profit target for all your trade.
For high probability trade, you can use a risk to reward of 1:2, 1:3, or more.
If it’s 1:3, it means a risk capital of $10 should make $30. Therefore, I can set a take profit at a price level that I will make $30 on the trade.
Another thing you should understand is that you should withdraw part of your profit regularly and take it of the cryptocurrency exchange.
Use it to buy some valuable Cryptocurrency and keep it in your investment account or keep it as cash in your bank account.
9. Avoid trading with signals or the news
Most news can be very manipulative and getting signals on the other side doesn’t guarantee you will make a profit if you can’t execute it well. Hence, it’s advisable that you focus on looking for high probability setup, and at the same time managing your risk instead of looking for news and signals.
If you do get news updates and signals without following all the above-stated approach, it will shock you that you will lose money.
In addition to that, we have what we call front running, which is a situation where the signal providers already took the trade before sending it out and then cash out on a lot of people when they got the signals and placed it.
We also have what we call shadow trading which is a situation where particular news is been broadcasted so that people could take a particular investment decision but in the end, a big market participant trades the opposite direction and wipes you out.
Another explanation of shadow trading is when you publish your trade position out for a lot of people to see, then as a result big market participants decided to take the opposite trade direction and wipe you out.
To avoid losses due to signals and news always make sure you wait patiently for good risk to reward trade and you use your stop loss.
3 Bonus Trading Tips
10. Find a mentor or join a trading community
Mentors are very essential if you want to be successful in any field of endeavors. They serve as gatekeepers ensuring that you stay accountable and you follow a sound, working principle.
If you can’t find a mentor you can decide to join a trading community like the 9jacashflow General Crypto Group. That way you can share ideas, collaborate with people, and learn fast through peer learning.
11. Stick to your plan and neglect the noise
Reading this article is the easiest thing but taking action and sticking to the sound principles that you learn here is the real work. To achieve greatness in trading you need to be focused, disciplined, and patient.
You just don’t have any option other than to stick to your plan and shun the noise if you want to be a profitable trader.
Don’t jump from one strategy to another or from one signal group to another. Save yourself time and be focused.
12. Monitor your trade and investment.
There’s this saying that “what gets measured get accomplished.” This is very true and much applicable to trading and investing.
Make sure you track your investment and pen down the dates and amounts you invest regularly. Blockfolio is a good app for cryptocurrency portfolio management, you should check it out.
For trade management, websites like Binance provides history logs that you can check and use to figure out ways to improve your trading significantly. That is making more profit and less loss.
The bottom line of this article is that understanding the landscape of investing and trading is very important if you want to be successful in the cryptocurrency space. You just have to know what you’re doing and allocate your capital wisely.
Also, trade entries are very important, hence you need to wait patiently for high probability trade setup(good risk to reward trade) and ensure you use the right position sizing technique.
Furthermore, once you enter a trade you need to set a tight stop loss so as to limit your loss. And if you eventually make a killing profit like 150% and above, you should definitely withdraw part of your profit and keep it in cash or long term cryptocurrency holding.
One last thing, do not borrow money from friends or family to trade or trade on their behalf. Just save yourself the headache, pain, and frustration from losing your relatives’ capital. Try to get a job and gradually build your trading capital and skill.
What do you think?🤔
I hope you’ve learned something new. Feel free to share your opinion or ask questions in the comments below👇.
Better still, you can message me on WhatsApp to enroll for my Cryptocurrency trading class that costs ₦50,000 or to join my private trading group for ₦20,000.
Looking forward to hearing from you.
PS: Trading is a probability game, act accordingly.
PPS: You also need a mentor or a good trading group. Message me on WhatsApp to join or make further inquiries.