So you’ve decided to trade cryptocurrencies. Have you already chosen a trading style or are you still searching for one? Listen, it’s better to read paragraphs of text until your eyes drop than to trade on a whim – without a strategy, without a plan.
Running from lions in the savannah, humans have perfected the art of taking risks. Our capacity to calculate the risks and rewards of taking an action is immaculate. Whether we choose to hunt deer amongst wolves or long Bitcoin among bears (the Wall Street kind) it’s all the same to our brain. Our brain has been molded into a shape capable of picking between right and wrong.
However, taking risks does not fall down to 50/50 outcomes. There are numerous factors behind a trade, which requires you to have a strategy. Thankfully, there are many trading styles to choose from in the crypto market – but you can also mix them together into a style that best fits your personality.
Trading Digital Assets
If you’ve read my price action guide or day trading vs. swing trading comparison, you’re acquainted with trading financial markets. And although technical analysis proposes that trading is a science with defined rules, that’s not exactly true. Everyone who traded with real money knows that trading is everything but a stable and linear experience.
How can a market worth two trillion dollars be stable? Joe from Canada buys and
Zhu from China sells. Another person from Europe stays delta neutral and 10,000 miles to the east a Russian oligarch can’t wait to dump his worthless rubles into Bitcoin.
There are so many players and factors involved that predicting the market’s direction is almost a fruitless endeavor. But don’t be discouraged. You can still create a system that helps you win more trades than you lose.
How Much Time Do You Have?
If you work a day job from nine-to-five, chances are you don’t have time to monitor the market all day. And how can a strategy that requires all your time and attention (e.g. day trading) suit you when you spend your day at the office designing marketing material or coding? Your best trading style might be predetermined by psychology, but factors such as time also matter.
Because you deal with various limitations, you should first come to terms with not how much money, but how much time you can invest in crypto. And even if you have all the time in the world, you might not have the leisure to spend it all on trading markets. Maybe you’re not used to staring at a screen for 10-hours, leading to severe brain fog that ruins your already terrible performance.
How Much Capital Do You Have?
High-frequency trading with $100? That’s out of the question, you can’t afford to make $5 a day. Capital size has a major impact on your trading strategy. Before entering the market, think of the amount of money you’re willing to risk. Only after making up your mind on capital can you think about your strategy.
To cut to the chase: the less money you have the fewer reasons there are to trade lower timeframes (LTFs).
LTF trading and high frequency trading depends on risking small amounts of money regularly and actively. So not only do you need to have enough money to throw away, but you also need to throw large enough piles of cash to make a buck. Will you day trade making $5 per trade? You might as well keep your desk job.
Higher timeframes (HTFs) trading on the other hand is perfect for trading swaths of cash – small and large. Not only because you’re chasing safer plays, but because you can’t execute trades on a whim. There’s no liquidity! Although, you can open a $5-million position and say goodbye to at least a quarter of the sum just to pay for slippage.
Read this article about liquidity to understand slippage
The ‘small size’ of HTF trading brings safety and lower risk. Both are perfect for building your capital slowly and steadily. Because let’s face it: it’s better to turn $100 into $10,000 over a few months than to turn $10,000 into $100 via LTF trading.
How much capital do you have? Answer this question and you’re already a step closer to finding your ideal trading style.
Experimenting With Style(s)
Now that you’re conscious of your time and money – or their limitations – you’re ready to experiment. No, I won’t give you a quiz that reveals the perfect trading style for you after answering 10 questions. You need to experiment, experiment, and experiment some more.
Have you ever started a new hobby as an adult? It’s hard isn’t it. Trying to learn a new instrument you slowly break your ego finding out that you’re not a naturally talented person. To make matters worse, your atrocious skills are vocalized into a magical tune of wrong notes and offbeat tempo.
Getting into a new hobby is the same as trading assets for the first time. You won’t magically make money just by being a unique individual interested in financial markets. This isn’t a rain man moment where the inconspicuous savant discovers his abilities nor will you find participant trophies here – expect nothing from a ruthless and predatory market such as crypto.
That’s why I suggest you experiment until you no longer want to experiment. And when you reach that point, you need to experiment some more. Even when you’re done experimenting you’ll still have to do it, because the market (like you) is never the same.
“No man ever steps in the same river twice, for it's not the same river and he's not the same man.” – Heraclitus
Experimenting helps you get on the right path. It’s a constant repetition of trial and error that builds your skills. You need to make a lot of mistakes before you find out who you’re destined to be on the market – much like in real life. If swing trading doesn’t suit you, that’s fine, you’ll move onto scalping. And if you’re terrible at scalping, keep moving forward, you’ll eventually find something that suits you.
Risk On or Risk Off?
Memorize that Heraclitus quote and remember: the market is not linear.
What works one day will be a disastrous strategy the next day. Although you can’t learn this by reading an article, you can gain a feeling for it through experience. Knowing when to risk and when to play it safe is an important component behind trading.
Let me put it this way. The market has been in dire need of a massive bullish rally for some time. The market doesn’t budge for months but eventually someone makes the first move and everyone else follows it. Ask yourself: risk on or risk off?
Longing a rally is obviously a risk-on case. As Crypto Twitter likes to say: long your longs. You shouldn’t be a smart contrarian nor should you wait in an attempt to short the top – the best case scenario would be not to lose all your money.
What’s a risk-off scenario? Let’s say that the market behaves irrationally, as it usually does. One moment it reaches the heavens and the next moment Mariana Trench levels – choppy conditions as traders like to call it. Will you trade market conditions like this one?
As a trader you must trade clear market conditions and setups. Play safe bets to protect capital and minimize losses. A market switching between manic and euphoric phases like a person with bipolar 2 shouldn’t attract you. It’s a risk-off moment, so change your strategy accordingly.
Bonus: Staying Up to Date
Staying up to date is universal for all trading styles and investors. Even a stiff Wall Street investor who hasn’t stepped a foot outside his Beverly Hills mansion reads about the state of worker’s rights in a West-African Lithium mining colony.
You should do the same as a crypto trader. Read about Ethereum’s latest development update and roadmap. Monitor Bitcoin’s network activity and the number of users running a lightning network node. These fundamentals influence crypto markets more than you can possibly assume. Something as insignificant as a rumor of a new regulatory framework can decide Bitcoin’s fate for the next year.
Many in the trading community believe that technical analysis and the market represent a chess board in which various trading patterns show potential price directions. A narrative is ultimately what forces the player to move in a direction and buy or sell, so stay up to date or suffer the consequences.
Ready to take your trading skills to the next level? I recommend reading the following articles: