With the advent of cryptocurrencies, trading has become a popular pasttime for many. There already are quite a few posts on steemit about the subject. You can start trading cryptocurrencies with little to no out-of-pocket expenses at all, perhaps from some faucet runs or other ways of getting some small amounts of satoshis (or other cryptocoins, perhaps a portion of your steemit earnings) and trade your way up.
"[The] goal is to trade well, not to trade often" - Alexander Elder
A knowledgeable trader is a profitable trader, so before you start you should probably do some research. Most of this post is inspired by a book by Alexander Elder called Trading for a Living - Psychology, Trading Tactics, Money Management. If you are serious about trading you should get your hands of a copy of this book (which can probably be found online) and read the first part regularly.
"You can succeed in trading only if you handle it as a serious intellectual pursuit. Emotional trading is lethal. To help ensure success, practice defensive money management. A good trader watches his capital as carefully as a professional scuba diver watches his air supply" - Alexander Elder
Beside an intellectual pursuit, you should also consider your trading activities as a profession and not as a hobby. Hobbies tend to cost money, not make it.
But lets get down to some basics, what is the difference between trading and investing? Well, there is probably not a tight line between trading and investing, investing tends to be long(er) term trading. Investors will likely disagree with the previous statement, but unless you invest like Warren Buffet ("our favorite holding time is forever") you will want to sell what you have bought at some point, and preferably at a premium. Investors however tend to use more fundamental analysis in their decision making processes where pure traders mostly use technical analysis.
Fundamental analysis takes a look a the fundamentals behind a stock, commodity, currency. It pretty much uses the traditional supply and demand factors to estimate the intrinsic value of the tradeable entity to determine whether it is under priced or overpriced. In other words, it tries to determine if there is a discrepency between the value and the price of a certain item ("price is what you pay, value is what you get"). You can trade based on fundamentals, but they are better suited for a buy-and-hold strategy. The rest of this post will not discuss fundamental analysis. Most traders will use technical analysis for their endeavours.
Technical analysis focusses on the market itself. It looks at the previous price action to (try to) determine future price trajectories. You can combine technical and fundamental analysis or you can use them by themselves.
"Technical analysis is applied social psychology. It aims to recognize trends and changes in crowd behavior in order to make intelligent trading decisions" - Alexander Elder
So if technical analysis is applied social psychology, we need to make sure that our own psyche does not get in the way of becoming profitable. We need to control our own greed and fear. It is our own fear that makes us hold on to losing trade, we hope things will get better. And it is our own greed that makes us take a profit the minute we see it. Doing this will actually make sure that in the long run you will lose your money. To trade successfully you need an edge, that is, a real trading system/plan, and stick to it.
I won't create a plan for you, but give some guidelines that will hopefully help you be successful.
First of all, let go of your fear of losing. Determine an exact entry point for a trade but also an exactly when you get out, even when you lose. Lots of traders try to 'average down' (dollar-cost-averaging) when trades go the opposite direction of their vision. This is generally a bad strategy to follow. If the trade goes opposite of your projected price, you were wrong in your projections and will probably be wrong again. Get out soon. The best way is when the exchange you use allows you to set a stop-loss order. This is an (market) order that gets executed automatically when a certain price gets hit. Set your stop-loss as soon as you set your entry point for the trade.
Your system should also determine an exact entry point and it is probably best to always use a limit order on your entry.
Some term definitions.
market order: buy immediately at the current best available price on the market
limit order: buy at an exact price you determine (might have to wait for the order to get filled, perhaps it won't execute at all)
stop loss: get out (with a market order) if the price hits a specified point
I want to repeat the previous point. Don't hold on to your losses. If you made a bad decision, deal with it and get out. "Cut your losses short and let your profits run".
Before you make an entry you should also determine exactly when you want to take your profit. Once that target is hit, immediately sell, but not a second before it. Too many times profitable trades become sour again before you made your profit. If you are not monitoring your trade minute-by-minute, you should set a limit order on the price where you will get out. Some exchange system will also allow you to set a 'trailing-stop-loss-order'. This is a stop loss that automatically moves in the direction you have projected the price will go.
Setting good trailing stop loss orders can be somewhat of an art, sometimes you get flushed out of a trade too soon. This is not an exact science, only experience can be your true teacher here.
Before I move on I want to repeat once again: "Cut your losses short and let your profits run". Trading (successfully) is mostly about managing risks. Therefore you should determine how much risk you want to take before you make an entry. A simple way of doing this is never risking more than 1% of your account balance. This is quite easy to achieve. When you enter a trade, use only 10% of your account balance for that trade and set your stop loss at 10% below your entry price (or above if you sell short). This way only 1% (10% of 10%) is at risk. Now if your analysis is solid (and preferably you have an exchange that can handle trailing stop losses) you can average up (instead of averaging down). That is, if the price is moving in your desired direction, you buy more and adjust your stop loss to maintain your risk profile. It is preferable to only add 25% to 50% of what you already are holding. "Make hay when the sun is shining". Big wins will pay for small losses.
The primary reason to have exact entry and exit points is that you will experience emotions (fear and greed mostly) when you enter a trade. If you have a solid plan of action and stick to it you won't fall victim to your own emotions. The market does not care about your emotions and will eat you alive if you become emotional about it.
"You have to observe yourself and notice changes in your mental state as you trade. Write down your reasons for entering a trade and the rules for getting out of it, including money management rules. You must not change your plan while you have an open position." - Alexander Elder
"Your trades must be based on clearly defined rules. You have to analyse your feelings as you trade, to make sure your decisions are intellectually sound. You have to structure your money management so that no string of losses can kick you out of the game." - Alexander Elder
"Your human nature prepares you to give up your independence under stress. When you put on a trade, you feel the desire to imitate others and overlook objective trading signals. This is why you need to develop and follow trading systems and money management rules. They represent your rational individual decisions, made before you enter a trade and become a crowd member." - Alexander Elder
That's it for now. I hope you enjoyed reading.
To your success,
-Kaj
ps: if this post sparked you and you want to read on check out:
Bitcoin & Altcoins Trading: A Complete Guide of How To Ride this Cryptocurrency Rocket to the Moon! Tutorial of Trading Strategy Insights, Fundamental Analysis, Technical Analysis Frameworks & Tools.