Understand your investments
It is very important that before a trader goes into any kind of investment that they first take the time to understand what it is, especially from a basic level, and also how feasible it is in terms of returns; because of this, one needs to do a thorough due diligence review.
For example, in the case with cryptocurrencies, one should know the type of digital coin they want to buy, what it is backed by, the team/advisors behind it, the accumulated market capitalization, the efficiency in transferability of the coin, the use of the digital coins, their popularity and adaptability, among other factors.
One needs to know the durability and longevity of the cryptocurrencies intended to be bought, and then integrate that into prefered position holding period.
Risk tolerance decision
A very important factor to consider is the amount of investment to put in, this is crucial as you do not want to invest all your life’s savings, especially into financial assets like cryptocurrencies.
It is advised that one invests sums of money that they would be willing to lose if things went haywire or rather if the market crashed.
Once you have an initial investment amount set up, you then would need to allocate it on different trades based on your risk tolerance, which is basically the amount of risk exposure that you can and are not only able, but also willing to handle.
This can be divided into two, i.e.,
1) Risk averse – not willing to take too much risk, and;
2) Risk taker – willing to take up more risk.
This can be determined from a personality stand point based on who you are as a person; personality tests can help to achieve effective results in determining this.
How to trade
Based on risk tolerance, traders then decide on the percentage amount of their account they are willing to risk per trade, this could 1% or 2% or 5% of your total amount.
This means that for every trade you place you have a pre-defined percentage that you base your investment amount on.
Trading involves strategies that define entries and exits, this is backed by a lot more factors such as the timeframes one wants to trade, that is; 1 minute, 15 minute, 1 hour, 4 hour, 1 day, etc.; Are you more of a long term trader where you buy and hold for week and/or months, or are you more of a short term trader where you hold trades for shorter periods ( a few days or so), or are you more a scalper where you look for tiny market movements that are mostly within minutes (less than a day).
Traders then need to decide on a risk reward scheme, this is the ratio of your take profit to stop loss, i.e, that is if you decide to use them.
It is recommended that you base your risk reward scheme on a ratio that is roughly above 1:1, if you have one that is lower than that, from a risk standpoint it means that you are taking up more risk than the ability to recover in case that you lose on trades.
Once you have that setup, you need to decide whether you will base your trades on fundamental analysis – which is the macroeconomic events and the financials of the companies behind the cryptocurrencies; or technical analysis – which is using charting tools to create trading setups based on your own analysis and using different indicators.
Whether you have built your own strategy or re-used different models and trading strategies that were already in existence, it is crucial to do a strategy test prior to starting to trade, by doing a back-test on the strategy to see how it would have performed using historical data, this will give you a clear picture on what to expect, note also that past performance does not always guarantee future performance, but relative to that, it enables you to know whether the system works, and the different kinds of modifications one can make in their favour.
Never trade with emotions
If you define your risk tolerance and have a clear trading strategy, you will not need to worry much about emotions, because the limits as to how much you are willing to take before it brings in emotionally interference is already pre-defined in the plan.
In trading, one need to understand that the market moves in kind of waves, and this sometimes involves very high and long term pull-backs that may cause unforeseen drawdowns of which may result in traders feeling rather uncomfortable and having the urge either to close positions or to enter more out of emotions and panic.
To avoid this impulsive trading, traders need to follow their strategies and plans, risk just enough capital of which they are willing to stomach.
In the event that traders are not feeling as confident enough to handle such market times, it is advised to trade on paper trading or demo accounts that depict live scenarios using virtual money, this will create more confidence and understanding of how the market moves and operates.
Take your time to understand how the market works and how to position yourself, do not be greedy when it comes to taking up your profits or closing positions, also, avoid altering or changing the strategy while inside trades.
Tracking of trades/performance
When trading, traders should take the time to reflect on past trades, what went right and what went wrong, then from this they can build up on better implementations to improve on future trade placements.
As you do this, you build up on track records that can be used to track different market situations in the past, and this may help in knowing which strategies work and which ones don’t.
Tracking logs of previous trades also helps in understanding how the broker or exchange defines spreads, related fees, and slippage of different trading instruments.
Stick to your plan
Take profit when you are supposed to take profit, and cut your losses as soon as your threshold is reached.
Do not hold positions just because you feel the market will turn in your favor eventually, otherwise this will result in emotional disturbance and frustration.
Always follow what you created and the strategy you built, and do not change the plan in between the trades just because the trades may be going against you.