Trading in the stock market and especially the never sleeping cryptocurrency market is nothing more than fighting one's way through a jungle of influences, emotional misperceptions, bull- & bear traps and unforeseeable circumstances that suddenly crash an investment that just seemed to be so safe.
No profession needs strict strategies & rules more than stock & currency trading, so the Cryptocurrency Investment Club developed following 5 GOLDEN Rules for minimising risk and getting the most out of your trades:
1. Be your very own trader.
One of the most common dangers in trading are external influences that lead to irrational perceptions and analysis of price movements. There are two established approaches for analysing companies (or projects, assets, cryptocurrencies...): Fundamental and Technical Analysis.
- Fundamental analysis covers the non-numerical aspects of a company including aspects such as the expertise of the team, stage of products, actual demand for the products, partnerships etc.
- Technical analysis is nothing more than "reading the charts". While this is certainly a science in itself, it is more suitable for short term trades than long term investments.
Those two ways of analysing a potential investment are a must before buying. Especially in the cryptocurrency market, where "trolls, shills and FUD" are spread on a daily basis amongst Twitter, Bitcointalk or other platforms of communication.
2. Do not FOMO.
The Fear Of Missing Out is, arguably, the second most dangerous influence in trading.
Let's take $NEO as an example: Cryptocurrency NEO, previously Antshares, is seen as the Chinese counterpart for Ethereum and recently had a bull run from about $0,40 to $15 back to $6, up to $60 and now back to $15. Now, obviously, it gained huge attention from every major news outlet in this market after announcing the exchange launch on Bitfinex (one of the biggest crypto exchanges), several partnerships with big names in China and the benchmark effect to Ethereum's run after having defined its USP as THE ICO platform which shot Ether from $10 to $400. It seemed like a puddle jump for NEO to reach $100 or more which, due to the emotionally influenced FOMO, triggered many investors to buy in.
However, the bull run was of short duration when China announced the regulation (rather nebulous ban) of ICOs and NEO bounced back to, now, $15. It must be noted that when the "hype" around NEO began, it had already jumped to $20-25 but ultimately helped boosting it to $60. Everybody who bought in at this hype stage and did not sell or place a stop-loss has now made a loss. This leads to Rule Nr. 3.
3. A 5% profit at no risk is better than a 60% profit at high risk.
What often is misunderstood is that trading is not about making as much money as possible within a short time but about continuously growing one's investments at the lowest possible risk. The extreme volatility in the emerging cryptocurrency market often induces to conduct risky trades with a high potential ROI. This, of course, is a tremendous opportunity and by no means a bad trading strategy, but it is still essential to follow the 5 GOLDEN Rules and especially rule Nr. 1 & 4. If no risk management tactics are being used, one can barely call it trading but rather gambling. Trading, in contrast to gambling, allows you to have control over the likelihood of success, not the casino.
4. Set stop-loss orders and sell step by step during a bull run / buy step by step during a bearish time.
After you have applied rule Nr. 1 and have found a great investment opportunity that shows strong fundamentals, or alternatively favourable technical signs, it is time to buy in. If the choice turns out to be a good one and the investment increases, it is more than recommendable to sell step by step on the way up until the initial investment is cashed out again. Speaking from experiences in the cryptocurrency market, it is not the worst idea to let pure profits have its bull run or even keep the profits, which effectively now haven't cost you a penny, for a longer term (1-2 years). The crypto market still is in its baby-shoes and mainstream adoption by several industries is only now slowly getting traction. Many cryptocurrencies traded back in 2015 or 2016, suddenly see ROIs of several hundred thousand % in 2017 (icostats.com), meaning that even small amounts of profits generated from trading back in 2015 are now worth 1000x or even more.
Turning the tables, if it happens to occur that an investment loses value after buying in, despite showing strong fundamentals for a long term success, it is advisable to purchase more at the now lower cost, ultimately driving down the total cost (base price) of the investment.
5. "Be greedy when others are fearful and be fearful when others are greedy" - Warren Buffett
The last GOLDEN rule is a statement by the man himself, Warren Buffett and is a must have in any investment strategy, book, guideline etc. Despite the form of market, if stocks, cryptocurrency, the tomato market after a rough year of farming, every market has bullish and bearish patterns. This means that there are times where a whole market seems to be unstoppably bullish (in an uptrend) or vice versa, completely bearish in a downfall with no end in sight. Smart money is made by buying after markets have been through rough bearish times, or by selling when markets live through a stage of irrational hype and media attention that push valuations above the true, incremental value. The key is here to find the bottom or the peak which is not an easy thing to do but certainly achievable following trading guidelines and, of course, the Crytpocurrency Investment Club's 5 GOLDEN rules.
Safe Trading!