Cryptocurrency trading can be complicated, but here are a few tips on how to get started on the right foot.
It doesn’t matter how experienced you are at trading, because nothing can protect anyone from the force of cryptocurrency price fluctuations. Currently, Bitcoin’s (BTC) volatility, the standard measure of daily fluctuations, is 64% annualized. By comparison, the same measure for the S&P 500 is 17%, while the volatility specification for WTI crude oil is 54%.
Nevertheless, it is possible to avoid the psychological impact of an unexpected 25% price fluctuation in a single day by following five basic rules. Fortunately, these tactics do not require advanced tools or large sums of money.
- Refrain from withdrawing the money for at least 2 years
Let’s assume you have $5,000 to invest, but there is a possibility that you will need at least $2,000 of that amount within 12 months for travel or car maintenance.
The worst thing you can do is allocate 100% of your funds to cryptocurrency investments, because you may need to close your position at the worst possible time, perhaps at a much lower price than the one at which you bought. Even if you intend to use your earnings in decentralized finance (DeFi) funds, there is always the risk of impermanent loss or hacks that compromise access to your funds.
In short, any funds allocated to cryptocurrency should have a minimum investment horizon of two years.
- Always use the dollar-cost averaging (DCA) method
Even professional traders are affected by the fear of missing out (FOMO), giving in to the urge to build a position as quickly as possible. If everyone is consistently earning returns of 50% or more and even meme coins are showing extremely strong gains, how can you stand aside and simply watch?
The DCA strategy involves buying crypto with the same amount of money every week or month, regardless of market movements; for example, buying $200 worth of crypto every Monday afternoon for a year eliminates the anxiety and pressure caused by constantly having to decide whether to add to a position.
Avoid buying all your positions in less than three or four weeks at any cost. Remember, crypto adoption is still in its early stages.
- Do not use too many indicators when performing an analysis
There are countless technical indicators, including moving averages, Fibonacci retracement levels, Bollinger Bands, the Directional Movement Index, the Ichimoku Cloud, the parabolic SAR, the Relative Strength Index, and many others. Considering that each has multiple settings, there are practically infinite ways to track these indicators.
The best traders have enough experience to know that reading the market correctly is more important than choosing the best indicator. Some prefer to track correlations with traditional markets, while others focus exclusively on crypto price charts. There are no right or wrong decisions here, except trying to track five different indicators simultaneously.
Markets are dynamic, and in crypto this is even more true given how quickly things change.
- Learn to stay on the sidelines
Every trader makes mistakes sometimes, and there is no need to compensate by immediately increasing the size of the bet to recover losses. That is exactly the opposite of what anyone should do.
Whenever you hit a bad streak, stay on the sidelines for a few days. The psychological impact of losses is a heavy burden and will negatively affect your ability to think clearly. Even if a clear opportunity arises, let it pass. Go for a walk or try to organize your life by putting trading aside.
Truly successful traders are not the most talented ones, but those who survive the longest.
- Keep investing when you are in profit
This may be the hardest lesson of all, because investors naturally tend to take profits from winning positions. As discussed earlier, crypto market volatility is extremely high, so pursuing a 30% gain will not cover previous (or future) losses.
Instead of selling for a profit when cryptocurrency prices appreciate, traders should buy more during these periods. Of course, we should not ignore market data or overall sentiment, but if your expectations remain optimistic, consider adding new units to your portfolio until the broader market signals some form of weakness.
Eventually, someone will achieve a 300% or 500% gain by being courageous and holding on to their most profitable positions. These are the returns you expect when entering such a risky market, so do not be afraid when they appear.