“Trading requires professionalism, consistency, discipline, repetition, and an ability to overcome repeated failure/disappointment”.
I don’t remember who said this, but I wrote it down in my notebook because I felt like it consisted of exactly what trading is all about.
Know Your Strengths And Weaknesses
As a trader, you need to know your strengths and weaknesses.
To start with myself I think my strengths are intuition, discipline, and good reading market movements. However, my weakness is that I often end up taking profits way too early (earlier than my plan, and in other words ruining my PNL). This has some negative consequences.
Let’s say my risk/reward for a trade is 1:2 (that means I risk losing 1 unit if I am wrong, but if I am right I win 2 units). Only taking trades like this should be a winning strategy in the long run (if your judgment of a 1:2 trade is correct obviously).
But to explain more about an error I make quite often, especially in scalp trading, let’s look at the current example:
Example
Let’s say you take a scalp 1:2 trade on $ETH, 2% SL, 4% TP, risking 1% of your total bankroll. Position size: Risk % / Distance to SL % = 1/2 = 50%.
Let’s say your portfolio is $100K.
You buy $ETH for $50,000, which is equal to 50% of your portfolio.
But you’re only risking 1% because your stop loss is 2%.
Confused?
You bought $ETH for $50,000. If $ETH goes down 2% ( $50,000 x 0.98) = $49,000.
It means that you have lost $50,000 - $49,000 = $1,000 which is equal to 1% of your initial $100,000.
In other words, your bet was 50% of your portfolio, but there was only 1% of the portfolio that was at risk.
A rule of thumb is to have a max. risk of 1-3% of your total portfolio.
If you want to learn more about crypto risk management, I have written about it here:
Okay, back to one of my weaknesses that I tend to do often.
Let’s say I take the trade mentioned above, but out of boredom, I follow the trade closely. The trade starts deep underwater, let’s say that it at some point is -1.5% and I’m close to getting stopped. Then the trade turns around and it’s going positive and then crabbing around +0.5-0.7%. Because the trade started underwater my “fear system” alerts me and tries to convince me to secure some profit with the reasoning that I almost lost 2%, then I should secure at least some profits.
We react more negatively to a loss than positively to a similar gain. Likewise, we prefer steady gains instead of bigger lump-sum gains. This is called Loss aversion and is a very common bias to have among traders.
I find myself doing this as I said especially after being underwater at the start of the trade, and also if it’s late at night with the reasoning that I will sleep better if I close at breakeven, instead of sleeping badly knowing that I can lose (or win). But it is the potential loss I’m focusing on.
Let’s take a quick look at my scalp trading account below from the 1st to the 7th of January 2023 to illustrate what I mean.
I’ve taken 39 scalp trades during these 7 days. The win rate of 76.92% is pretty good, but that doesn’t help when my losses have been bigger than my gains.
Actually, I had 18 wins in a row and a perfect start to the year, but then my first loss came because I forgot to check funding. I ended up paying 2% to people who were in long positions. The position in itself actually ended slightly in plus, but since the funding rate was higher it’s shown as a loss, which is correct.
A little pissed off I wanted to make it back again quickly (yolo-mode), but just ended up losing for the rest of the day. Basically, a small tilt because I revenge-traded.
You can see on the chart that there are some small wins along the way after the first loss, but as I described earlier I became too defensive (I ended up taking profits way before my targets because I was so focused on not losing more). Unfortunately, I did the opposite of what you should do:
“Cut losers fast, let winners ride”.
I, on the other hand, cut the winning trades fast at a small profit and let my losing trades ride until I was stopped. It’s ironic because I knew exactly what to do, but I didn’t follow the plan. I let the psychology of my head get in the way of the psychology of trading.
Regarding some books to get better at trading psychology, check out this list:
Luckily spot buying of some coins has performed way better so far in 2023, so I’m not net negative for the year.
Staking and AI coins like $LDO and $GALA have performed extremely well in the first week of January.
To end this, let’s look at some general rules I follow when I’m trading:
Some General Rules I Follow When Trading
Never chase the price unless you scalp (and have an edge in doing so). Let’s say you want to buy $ETH at $1,250, but the price is now $1,280. What do you do? Do you chase the price and market buy at $1,280 or do you place a limit order at $1,250? There’s no right or wrong answer as it depends on what kind of trader you are, but I believe most people would be better off limit buying at $1,250. A general rule is that the longer the timeframe you trade on, the more favorable it will be to place limit orders.
Always use a stop loss. An example of why you always should use an SL was very visible yesterday. $LDO was sitting at $1.64 before it suddenly pumped 65% in 15 minutes. Imagine being short at 1.64 and not even having a 5% stop loss (which means being stopped out at $1.72).
Instead, you got a 65% move against you, and are paralyzed by fear you can’t even do anything. Even using 2x leverage would have completely wiped out your account. It’s worth mentioning that the candle quickly retraced, but still, it stabilized for a while 30% up. Much better to lose “only” 5% by using stop loss IMO. In this case, your stop loss would’ve probably not been executed though as the price was rising so quickly and your stop loss was being gapped (your stop loss price was jumped past). So there are always risks trading crypto regardless of whether you have a stop loss.
Don’t get FOMO. I’m in several Discord groups and there’s always a move happening. There’s always a bull market for some coins. You just got to accept that you can’t catch them all. Remember that in these groups there are lots of different traders (eg. TA traders, fundamental traders, news/narrative traders, scalp traders, etc.). Your job is to find out what trading style suits you, and if you copy trade set your own stop loss/take profit as you might not be comfortable about what your Discord guy has as an SL/TP.
Don’t expect anyone to hold your hand and help you. In trading, we talk a lot about making money. But the truth is that what actually happens is that you take money from someone. You winning a long trade on $BTC means that another trader being short on $BTC loses money. So you’re actually taking money from the losing trader. Trading is a pure PvP (player vs. player game). You might get a lot of tips on Twitter/Discord/telegram etc. But sometimes ask yourself why they’re sharing. Are they good guys or simply hoping that you FOMO in so that you could be their exit liquidity? The smaller the mcap of a coin, the more skeptical you should be about a tip you get from someone (because of how easily price increases/decreases).
Don’t overtrade/revenge-trade. This is easier said than done, as I’ve done this myself. Let’s imagine you lose a trade, and you get pissed off and want to make it back quickly. This is human nature, because of how bad we feel about loss aversion. But remember that when you’re revenge trading you are not thinking rationally. You are taking non-calculated bets, and some even use high leverage so that the loss can be recovered more quickly. But as you know,
Cut your losses quickly. Before you place a trade you should set your stop and take profit level. If you’re not doing that you’re going to experience episodes where you say to yourself: “I’ll just hold it a little bit more, I can afford to lose 1% in hope that it turns around”. And then 1% more, and 1% more…If you’re in a losing trade it’s better to just cut it quickly, otherwise, you’re going to end up bankrupt sooner or later.
No indicator beats screen time. Of course, what I am talking about here is trading on lower time frames, typically scalp- and swing trading. If you follow the price action on the chart constantly you get a better intuition for price movements than simply having an alert on RSI/EMA and all the other indicators.
Follow the general market (BTC/ETH/SPX). If these are up, altcoins are easier to trade in a long direction compared to if the majors are down. Pretty self-explaining really, but worth mentioning because so many people think that a coin will run huge because of a catalyst at all times. But if the overall market isn’t on your side, don’t expect your trade to win.
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