Dos and Don’ts of Crypto Trading

Posted on 4/10/2021 by Andras

Crypto offers some life-changing opportunities. Some traders think we won’t have another moment like this in our lifetime where we can create wealth and be part of such a large-scale financial revolution.

But even if the opportunity is there, you still need to be able to take advantage of it. So, what are simple dos and don’ts that could help you do that? We’ve collected some in this article.

1. Do: Stay alive

This is a fairly simple point that you’ve probably heard explained by OG crypto traders, but it’s a crucially important one. If you take away only one piece of advice from this article, it should be this one. 

In crypto, the most important thing you need to do is survive. This technology is likely a harbinger of a multi-decade macro shift in finance, economics, organizing people, and whatever other use cases we’ll figure out for it. You’ll have plenty of time to take advantage of the opportunities. That is if you’re still there to take advantage of them. Survival is key. 

If you use unreasonably high leverage or bet the house on each trade, you’ll get wiped out. Not trying to make it all at once does require patience, but it’ll also make sure that your account survives another day. Managing to stay in this market is half the battle. 

This also applies to separating your trading account from your basic expenses. If your entire portfolio went to zero tomorrow, how long could you live comfortably with your savings? Months, years, decades? If you’re in a tight spot financially, trying to stay afloat by trading is generally a bad idea. Naturally, it will also have a detrimental effect on your ability to survive in this market.

2. Do: Use common sense

This may be a bit of an underappreciated point, but common sense can be a powerful tool when it comes to trading. 

It’s easy to get lost in long sessions of fundamental analysis, on-chain metrics, thousands of technical indicators, strategies, trading bots. You have so many options regarding how to express your views of the markets. But if you don’t try to consider larger contexts, your analysis may be useless.

Is the middle of a brutal bear market the best time to take on copious amounts of risk and ape into high-leverage longs? Probably not since the direction of the wind isn’t blowing in your way, and the general risk-taking appetite in the market is low. 

Triple divergence on the RSI on the 1-minute chart after the United Nations has announced that they are making Bitcoin the de facto unit of account on planet Earth? Probably not the time to all-in short.

While markets are complex, sometimes simple ideas can prevent you from making unnecessary mistakes that can chip away at your portfolio.

3. Do: Have a plan

Do you know what kind of trader are you? Are you a scalper, swing trader, fundamental investor, quant, DeFi degen? It’s important to know what you’re good at, and what hasn’t been working. Once you do, you can play to your strengths much better.

For example, it’s a common mistake to enter what starts out as a day trade, and “turn” it into a swing trade when the market goes in the other direction. If you enter a position based on some analysis, and that analysis turns out to be wrong, it’s better to take the loss than ride it out and hope it’ll come back to your entry. Maybe you’ll get lucky and it works out a few times, but if you do this regularly, it will certainly backfire on you.

You need to have a plan, and you need to stick to it. Does that mean that you need to be extremely rigid with the plan itself? Absolutely not. If the plan isn’t working, change it, iterate on it, learn from your experiences – seek constant improvement. But, if you don’t have a plan at all or you have one but don’t stick to it, it can be quite difficult to maintain consistency in your trading performance.

4. Don’t: Blindly buy something because someone told you to

Look, one of the best things about this space is the free flow of information. The so-called alpha is there, you just need to find it. What’s more, there are many incredibly helpful people who are genuinely trying to help you get a bigger piece of the pie. 

This is actually a stark contrast with the traditional financial markets, where most traders with a solid edge keep it under close guard. Otherwise, their specific knowledge would become common knowledge, and it would lose its efficacy. Even so, while some people in crypto will help you improve, the most profitable strategies you’ll still need to find yourself.

But what is it that most beginners do instead? “Bob on Twitter just said that he’s in this coin so I’m buying in!” Well, it may work out or it may not. There are so many unknown details here. What was their entry? Are they already up 10x? Have they been paid by the project team with a free allocation? When are they going to exit? Are you their exit liquidity? What is their incentive to share this pick with you? You need to carefully consider the context of the situation.

Does this mean you shouldn’t trust anyone? Of course not. It’s probably a good idea to keep a close group of friends around who also trade and whom you fully trust, and then you can use your collective wisdom to find that edge.

5. Don’t: FOMO

“Elon Musk just tweeted about Dogecoin! Actually, it was 32 minutes ago, and DOGE is already up 30% since then, but it will surely keep going up, let me just buy in with my entire account!” And suddenly, this turns into the story of how you’re getting rekt buying the top.

FOMO (Fear of Missing Out) is a powerful emotion to deal with. Not even the most experienced, successful traders are immune to it. It feels like everyone around you is making it, and you’re not, so you absolutely must buy in. 

However, FOMO-ing into a trade typically ends in tears. Once a coin has already experienced a face-melting pump that makes you feel serious FOMO, it’s probably not the right time to build a position. The best times to buy tend to be when it’s difficult to get yourself to pull the trigger. When you’re FOMO-ing in, you’re adding to the top level of a house of cards that may soon come crashing down.