MarketWatch: 10 Rules for Cryptocurrency Traders
If you’re reading this, I assume you know cryptocurrency basics — for example, that crypto is digital or electronic money not backed by a government or bank. To protect your account, you probably know to store crypto in a digital wallet, preferably offline on a computer, thumb drive, or mobile device. And you should know that crypto currencies are extremely volatile, highly risky and easy to manipulate.
If you still want to trade crypto, let’s discuss security. First, open an account with a trading platform you can trust such as Coinbase or Robinhood. Yes, there are other platforms but you have to start somewhere. These two well-known, reliable providers will do the job until you can separate the good from the bad.
By the way, absolutely avoid fancy online brokerage firms or crypto exchanges that you’ve never heard about. Many are scam sites designed to exploit your inexperience. Please do basic research and never give your money to unknown companies. Here’s an idea: Call or email the brokerage before transferring your money and determine its level of service. Better yet, see if the company even exists.
Second, although there are thousands of cryptocurrencies (some real, some fake), stick with the most popular and most liquid crypto in the world: bitcoin. After you gain more experience, feel free to trade other cryptos (after bitcoin, Ethereum is the second-largest).
Now let’s talk about trading. The first question most beginners want to know is, “Can I make money trading crypto?” The answer is yes, but it takes skill, discipline, and due diligence. Crypto is still in its early stages and it could take decades for it to be accepted and backed by a government or institution (if ever). Until then, buyer beware.
The worst part is that the crypto universe is populated with dark money, manipulators and pump-and-dump manipulators who give misleading advice on social media, lure you into buying their bogus currencies or try to convince you to join their phony crypto exchanges. Right now, crypto is pure speculation, but as long as you do your research you should be able to avoid scams.
Since you’re now aware of some of the risks, here are the top 10 rules that every beginner crypto trader should remember and obey:
1. Scale into a trade rather than plunking down large sums of money: If you’re new to trading cryptos, it’s a mistake to put large sums of money into bitcoin (or other cryptos) all at once. Because crypto is so volatile, instead of buying $1,000 in bitcoin, for example, start with $200, and if it’s moving in the right direction (up), add another $200. Keep adding until your position size is fully funded.
2. Buy and sell at extremes: Whenever you trade a volatile financial product such as crypto, you must routinely take profits. If your gains are extreme, sell half or all, but take something off the table. Resist the urge to be greedy when trading crypto (i.e. Fear of Missing Out or “FOMO”) or you risk holding until you lose most or all of your money.
3. Trade small: At first, aim for small gains. Sure, some people have made millions of dollars trading bitcoin, but like lottery winners, there are many more who have lost all or a good portion or all their money.
4. Never buy on margin: When you go on margin, you borrow money from the brokerage to increase the amount you can buy. This is leverage, and it’s a double-edged sword. If you’re right, you can make substantial profits. If wrong, you may owe more than you invested. Wise traders manage risk, and that means not borrowing money to buy crypto. (You’ll know what I mean after you get your first margin call.)
5. Keep mental stop-losses: It’s always wise to have stop losses, but because cryptos move so quickly, “hard” stop losses are often ineffective (one reason many platforms won’t let you use hard stops for cryptos). Instead, use “mental” stops and have the discipline to obey them. An alternative method is a “time stop,” i.e. tell yourself you will sell the position by a certain day, Friday, for example. This is an effective way of forcing yourself to lock in winners and cut losers.
6. Don’t hold losing positions: If a trade is going against you, consider selling all or half — don’t let small losers turn into big ones. It’s true that those who sold bitcoin at $20,000 were shocked when it skyrocketed towards $60,000. Rule No. 7 shows you how to handle that.
7. Have a trading plan: It’s important to have a trading plan, especially for cryptos. Have a plan that helps you decide when to buy or sell. Follow the plan and obey your rules.
8. Use technical analysis: Technical analysis gives you clues when to enter or exit a position. For beginners, the best two indicators are moving averages and RSI (Relative Strength Indicator). They are easy to grasp and provide good signals.
As of June 30, 2021, bitcoin was well-below its 20-, 50-, 100-, and 200-day moving averages on the daily chart. (Bitcoin needs to rise to its 200-day MA of $43,794 to climb out of the basement.) On the weekly chart, although consolidating, bitcoin is still slightly above its 50-day moving average.
RSI is 44.72 for bitcoin on the weekly chart. Although oversold, it’s not at extreme levels yet. At 30 or lower, it’s extremely oversold, but don’t use RSI to time when to enter.
9. Diversify: Never put everything you own into one financial product. Buy crypto but spread your money across non-crypto investments. If that isn’t possible, make small purchases until you gain more experience and knowledge.
10. Practice with a simulated account before buying: If it is available, practice in a simulated or paper money account before trading with real money. If you don’t have access to a test account, follow Rule No. 3.