While I consider myself an amateur trader and a small-scale investor, over the 2+ years of trading crypto I’ve learned some things I’d like to share with you all, but mostly with those who are making their first steps into the uncharted cryptoland.
Just as with anything else in life, trading cryptocurrencies is context dependent. That means you should remain a healthy sceptic about general truths, universal rules and things that “everyone knows”. Consider the famous “buy low sell high” dictum. The definition of high and low is subjective in most cases since it depends on your timescale, goals and trading strategy. If you’re a hodler, as are many of the fellow redditors here, your high and low will differ dramatically compared to the day trader’s.
It is for the same reason that bulls and bears don’t really matter. Whether you’re ‘bullish’ or ‘bearish’ depends on your strategy and timescale. Consider this: to someone hodling BTC since 2013 a dip here or there (even a prolonged one) makes little difference because the price of BTC over the time continues to grow monstrously – you can call it one long-term bull market.
At some point, you’ll bump (or you already have) into something that is called ‘technical analysis’. Let me save you some time (and money, probably) by telling you this: technical analysis is neither technical, nor is it very analytical. While many traders regard TA to be a scientific way (supposedly based on mathematics) to read and predict the market moves, TA has little to do with any formal science. Differently from the surrounding physical world, we are not aware of any physical laws that govern our human behavior, including markets. If it was possible to mathematically calculate and with certainty predict market moves, the big buck guys in Wall Street would have already done it. Think about the major financial crises for a moment – just like the Spanish Inquisition, nobody (well, almost nobody) ever expected one. Does it mean TA – trends, chart patterns, MACD, RSI, Elliot wave count, etc. – is a complete rubbish? I wouldn’t go as far as to claim that. It is somewhat helpful – if only a little, TA still gives you a feel of the current market mood. TA also does one other thing pretty accurately: it graphically represents historic data of human behavior in the financial markets. Surely you can benefit from that? Or do you? This brings me to another point…
Beware of historical analogies and ‘I knew it all along’ thing. As humans, we are prone to hindsight bias, a tendency, after an event has occurred, to see it as having been easily predictable. We are all blinded by hindsight bias because our brain looks for simplistic linear link between cause and effect. This way when an unexpected event happens, the brain uses the knew-it-all-along mode to cope with cognitive dissonance and make sense of the surrounding world. While trading hindsight bias harms you in two ways: a) it drains you psychologically for not making ‘the right’ decisions in the past, and by luring you into oversimplified historic analogies, b) it creates a false sense of investment security at the present time. Just look at everyone complaining they’ve sold their BTC at the worst possible time (as a matter of fact, I am no different – I still autodestructively loathe my decision to liquidate a large portion of my BTC portfolio after the BTC price hiked to 8k). It is also very tempting to think you wouldn’t miss ‘the next bitcoin’. The problem is, though, that it is incredibly difficult if at all possible to spot such an opportunity. You have to be either lucky or extremely well informed (and lucky) to capitalize early on such opportunity. In reality, it’s very difficult to differentiate between useless information (noise) and something that truly matters (signal). Which brings me yet to another point…
Stop being a news junkie and start filtering what you read/hear/see. If you don’t, at some point in time the quantity of consumed news will start to impact your decisions and it will begin to negatively correlate with the net gain of your investment portfolio. Instead of reading news nonstop, better educate yourself – dive deep into the market fundamentals and the technology you’re dealing with. This way it will be easier for you to spot new lucrative investment opportunities when the time comes.
Accept the fact that idiots also happen to make lots of money and move on. Multiple times too, if they’re lucky ones. However, the net worth of (lucky) idiot doesn’t mean you should imitate him and become one. Some two months ago a Dutch father of two young children sold his family’s house, bought BTC and other cryptocurrencies, and relocated his family to a rented property. After the recent spike in BTC price the guy’s net worth must have increased substantially. So, is he an idiot? Absolutely! It is only a question of time before he ruins his own and his family’s life with some incredibly reckless financial decision.
Try to understand the motives governing your decisions and act (or don’t act) accordingly. If your actions are about to be driven by extreme emotions such as fear, panic or excitement – stop immediately and reevaluate the situation. Otherwise you’ll end up belonging to the FOMO buyer/panic seller club aka the money losers. If you want to stay on the earning side long term, you must keep your head cool and think clearly.
Day trading is probably not for you. Consider this: evidence in neuroscience research shows that we are a loss-averse species. For this we should thank our stone age ancestors who had barely enough food, shelter and belongings to survive in a very adverse world. Losing even a little of what they had meant their existence was in jeopardy. This explains why contemporary humans prefer avoiding financial loss to making financial gain. Neuroscientists claim that losing money activates the same area of the brain that responds to mortal danger. This is why in order to do day trading you must have A LOT of self-control and balls of steel – there are many ups and downs during a single day. It drains you emotionally, you end up being addicted to adrenaline, your fiancée hates it, and the hodlers will probably outperform you in the long run anyway.
Volatility is your friend. Over time BTC volatility makes the coin stronger, not weaker. While wild swings in price makes BTC almost impossible to use as a currency, volatility is good from the financial asset point of view. Traders and investors dealing with BTC get used to huge and sudden price hikes and dips. Unlike for any ‘stable’ stock of any prominent multinational corporation, even substantial and unexpected shocks will not undermine the confidence in BTC. BTW, best of luck to everyone planning to short BTC. 🙂
Make small mistakes, learn from them, get wiser, err less. In your childhood days, you needed the experience of burning your hand with fire so that for the rest of your life you wouldn’t need to think about the painful experience. That information is now hardwired in your brain and helps you to avoid getting harmed. If you’ve just started trading crypto, expect to make mistakes and prepare to learn from them. It’s only after you get into FOMO, get panicked big time, take too big a risk, get out too early only to jump in at the worst possible time, ONLY and ONLY then you’ll start to improve.
The Road to Wisdom
The road to wisdom? —Well, it’s plain and simple to express: Err and err and err again, but less and less and less. — Piet Hein
Hope that was helpful.