Crypto Trading Mistakes to Avoid
John Barry | Mon May 10 2021
A key part of trading is learning from your mistakes. If you can learn from other’s mistakes that is even better. In this article I discuss 6 mistakes, all of which I’m guilty of, except for the "Get rich quick scam". So hopefully you can learn from my mistakes and not yours
Lack of investing and trading plans
I will be writing a full article on having a good investing and trading plan in the coming weeks. For the short version, manage your money to have both an investing allocation and trading allocation as a best practice. The investment portion is a simple buy and hold that does not get moved. For the trading part, wait for your investment to have significant gains and transfer a portion of those gains into a trading bucket for yourself.
The trading allocation is used for opportunities of achieving higher gains than simply holding an asset long term. As trading gains are achieved, some of the profits should be moved to the investment allocation.
If you are new to cryptocurrency and want to get started, a simple plan is to dollar cost average (DCA) as you buy into a cryptocurrency investment. For example, you can separate the funds you want to invest into 4 parts, invest 1 part today. Invest the other 3 parts equally the next 3 months, look for a buying opportunity. Bitcoin has many 20% dips (16 during the past 3 years), wait for a dip, and make your next purchase then.
FOMO
We are all emotional, it is difficult not to be when trading. If you are following a cryptocurrency that you researched, and it suddenly shoots up before you have entered a position, the emotional response is to buy. However, before hitting the “buy” button, you need to make an evaluation, is this a temporary short-term increase or really the beginning of larger price increases that will continue? Additionally, you need to follow the rules of your trading plan.
Key evaluation questions are:
- How significant is this price move?
- How far away is it from the price levels it traded at during the past few weeks?
- What is the current trend for this asset?
- How big was the actual price move? Is it within recent support and resistant levels? If the price move is the support and resistant levels then it is safer to position in. If the price movements are at all-time highs and the jump is greater than 5%, then caution is needed.
Remember, an “all or nothing” approach is not good. To avoid FOMO you can DCA into a position. If the asset continues to go up, you have a favorable position. But if the asset suddenly retreats to the prior price level, you can apply another DCA allocation at the level you wanted.
A similar thought process needs to occur to avoid panic selling. Remember it is never a bad idea to take profits off the table and avoid the all or nothing approach.
Over Trading
After you decide to take a position, you need to follow your trading plan. First, have confidence on the trade you made, if you followed your rules, you should be good. Second, fully consider the profit levels you want to from your trade. When you achieve a profit, you should safeguard it by selling part of the position.
An important rule to follow is not to play the in and out game with a trading asset. I see too many people sell a position, then it goes up and they buy the position again at a higher price than they just sold it at, then the price goes down and they sell. Remember your mindset should be buying low and selling high. Allow your trade the necessary time to make a profit.
Over time, if you see that the transaction fees you are paying is greater than 25% of your profits, then you are over trading.
Trading on bad crypto exchanges
There are over 400 cryptocurrency exchanges, so you should want to be trading on an exchange that has high scores for trust and ranking. There are multiple ways to check on this. Coingecko provides a “Trust Score” for cryptocurrency exchanges https://www.coingecko.com/en/exchanges?page=1 Use an exchange with a high trust score.
If you find yourself going to an unheard of exchange because it’s the only one that trades a specific cryptocurrency its probably a bad idea. If you are trading a crypto asset that trades on multiple exchanges pick a well-known one that has a favorable ranking by a 3rd party website that ranks them.
Get-rich-quick scams
The dark side of cryptocurrency projects are the scammers. Bitconnect being the most famous but if anybody performed research and read its whitepaper, they would realize it was a Ponzi scheme. Bitconnect is not alone. Daily I come across proposals from people that “have a friend that wants to purchase Bitcoin and is willing to pay higher than market price, can you help”; I do help, I tell them to open a Coinbase account to make a Bitcoin transaction. A theme in many scams is: for just a little bit of capital, perform this easy task and you will get rewarded excessively – Don’t fall for it.
A common thread scams and get rich quick share is that they prey on people’s greed to make easy money. Like investing, you should learn to be content to earn appreciation over a longer period of time. If you are already in a good cryptocurrency investment, then there is no need to rush it.
Trading on margin / leverage
Have I traded with leverage before and made higher profits because of it? Yes. Have I traded with leverage and suffered bigger losses? Yes, again.
Avoid the lure of a shiny object that is margin trading. You will see headlines, “I made 1000x” on this trade, and they are hard to ignore. If anybody had the ability to do this twice, they could comfortably retire with an abundance of capital to live their dream. The reality is thatthere is no sure thing when it comes to investing.
Many people realize the massive risks that come along with trading on margin, yet people still choose to do it all the time. This impulse for faster gains makes these traders neglect to save profits and have cash on the side to enter dips. A problem many experience is starting with a success story on their first margin trade. This leads to over confidence that this pattern will always work. Often traders will continue to margin trade until a significant loss occurs wiping out the majority or all of the profits from the prior margin trades. Sadly, a person’s last margin position is often getting caught on the wrong side of the trade and get liquidated out.
The following linked story talks about $20 million fund Adaptive Capital. Adaptive Capital was founded by Princeton graduate and successful Goldman Sachs trader, Murad Mahmudov, along with on blockchain on-chain analytics expert Willy Woo. They were in leveraged long positions for Bitcoin and were forced to close due to being liquidated in March of 2020.
The tragic part of this story, if they bought and held Bitcoin without being leveraged, the fund would be worth over $120 million today.
A key point with trading, you are not always going to be correct. One of my golden rules of cryptocurrency trading is not to get REKT. Margin trading violates this rule. If you are in a good investment, it will reward you over time.
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None of this is meant to be financial advice and I do not have any financial expertise. Although I worked at the New York Stock Exchange for over 23 years, it was as a developer supporting computer systems, not as a stock trader.
Full discloser: I do own Bitcoin, Ethereum and other Altcoins.