In this article we want to discuss the basics of trading systems and money management. In the last months I have written some basic articles about trading for beginners in addition to the price analyses. I talked about fundamental and technical analysis and discussed in this context what has to be considered in the different trading approaches, especially in the technical analysis.
However important technical and fundamental analysis may be, more fundamental is important for day-to-day trading: How do I invest money so that I end up going home with a plus if possible?
The problem is this: Even if the price, trend, indicators or other signs speak for a certain development, a price can still move in exactly the opposite direction. You can find tons of information online but you need to start somewhere, the Cryptotradingbook.com/ is a good guide for beginner.
This is not simply due to one’s own fallibility (but still in the place of mea maxima culpa), but also to spontaneous developments that were not predictable in this way. Especially small Altcoins show a volatility that is hardly predictable over medium-term time scales.
In this respect it is clear that it takes more than knowledge of indicators etc. to not simply gamble. No, I want to express myself even more radically:
Trading is gambling
Boom, there you have it. “What will a system bring then” some will ask. Well, there are games of chance and games of chance. Roulette or heads or tails have a completely different character than horse and sports betting or poker.
The first form of gambling is completely coincidental, while the second form allows well-founded assumptions: despite all my love for the country of my birth, I know how unlikely Austria’s World Cup victory in football is. So I will not necessarily bet my money on Austria!
The same can be said about trading: on the basis of a well-founded assumption I can invest in a crypto currency. I get this assumption through an analysis – be it a fundamental one, a technical one or a combination of both.
But the basis of my investment remains what it is – an assumption. That’s why it’s good to hedge yourself sensibly. I would now like to talk about such hedges.
Do not invest more money than you can lose
“You gotta lose Money to make Money.” So says the vernacular and he is right. Even a careful course analysis can do nothing against abrupt events. Let’s remember the DAO at this point: the course of Ether and BTC has developed dramatically well – up to the hack. The DAO accident is shown once again:
Even if you estimate a price development correctly, it can happen that the technology doesn’t play along: some time ago I wanted to sell a part of my ethereum profitably, but that didn’t work under jaxx. No trading analysis helps against such incidents!
Finally, I would like to remind you of MtGox, Cryptsy and Bitfinex – I myself had made some loss in the case of Cryptsy. In the case of MtGox, some people lost more than just something: there were traders who pumped all their savings into Bitcoin or put credit cards into the limit in favour of Bitcoin. Unconsidered trading can therefore ruin your financial existence.
- In this respect the following rule of thumb is best: declare everything invested in crypto currencies as expenses for yourself. Since I generally assume that the reader will not spend more than he can afford, the rest will be settled.
- Trading guidebooks are often even stricter at this point, where you sometimes read that you should invest a maximum of 2% of your money available for trading in a trade. I see that a bit more casually.
- We are dealing with a market with significantly lower costs, in which, should a trade go down the pants, one can sometimes be a frustrated bagholder for some time – it costs us nothing to hold this position.
Although it’s not necessarily the case in the shitcoin sector that a coin has to rise again after a dump, the situation with Tier 2 currencies looks more interesting.
Invest with a plan
Who doesn’t know it: Coin xyz shoots up or shows signs to do the same. Either you buy now enthusiastically or you belong to the lucky ones who have already bought. Question: when do you sell? (Sure, question is also whether one should really buy…)
I have often noticed that I buy myself into a currency at some point and then want to keep the value as long as possible. If you have the time or if you practice scalp trading (i.e. if you only hold trading positions for a very short time, a maximum of a few hours), you can proceed in this way. One observes the price very closely in the time and exits as soon as the situation becomes tricky.
But if you buy into a bullish currency in the morning and realize after work that the situation has changed dramatically? Maybe the price is now below the value of this morning… what do you do then? Waiting for better times? They may come, but especially in the Shitcoin area it is possible that an extremely lucrative pump has come to an end and won’t come back for the foreseeable future.
That’s why it makes sense to always trade with a plan. A first possibility is to consider an exit in advance, when you can get out of a trade again. You can tell that by a certain value, that you say “at value x I sell, no matter what the signs are”.
This is the simplest method, which has the advantage that you can automate such a plan in many Exchanges. Of course, in a proper rally you can get out too early and make less profit than would have been possible!
On the other hand, the probability of jumping too late is much lower – all bag holders of any shitcoins who experienced a pump and dump scheme will know what I mean. Exiting with such a plan gives a boost to one’s self-confidence – after all, one has traded in the plan and made a profit!
A more complicated method, which I would like to recommend to everyone, is to set up stop losses: When you buy, give a value slightly below the low of this and the last day (or the period you use for trading).
If the price falls below this price, you sell. In this way you prevent significant losses (you can use a similar tactic for shorting, but you can use a different article). As long as the price goes up, you can adjust this value daily accordingly. In addition you can hold the position in the time depending upon its possibilities simply or further “buy”.
This can be automated on many exchanges. At least on TradingView an alarm can be set, so that one receives an email or SMS, if the price rises below a set level. In the latter case, you still have to take action yourself, but thanks to Smartphone and Co. this is not impossible.
With the help of Stop Losses you prevent that what you have won from being completely vaporized by emotions brand “to the moooooon!!!” with a pump.
These stop losses are important because – see point 1 – we only have a limited amount of money – so each loss makes it more difficult to make a total profit – which brings us to point three.
Keep an eye on your money
Primarily in the currency you use as the basis for your trades. If you deceive crypto against euro, then euro, in the case of Altcoins against BTC Bitcoin. Yes, there are also people who think you shouldn’t do that: The recalculation to the original currency could fuel one’s own greed in good times or fear in bad. Of course, everyone has to decide for themselves, the clear figures help me to recognize the quality of a trade at an early stage.
It often happens that you hold on to positions because you don’t remember the concrete countervalue. I have therefore made it my habit to always keep an eye on potential value gains/losses.
In addition one regards not only the exchange value, but also the Tradingfee as well as the transaction fees – always counted back on the starting currency -, in order to see in such a way, how the own assets develop.
In the first point, I pointed out that you should not trade more than you can lose. This point should not only be seen in terms of existential fears, I suppose that the majority of readers do not go all out.