In a little known story, Sir Isaac Newton bought some stocks of the South Sea Company, a British trading company popular back in the 1700s. He sold the shares for a nice profit, but shortly after he got greedy and swept up in the exuberance of the times. The mathematician bought back the stock at a much higher price. Unfortunately, he lost almost all of it — equivalent to millions of dollars in today’s money. The great physicist “could calculate the motions of the heavenly bodies, but not the madness of the people.”
Since Newton made his ill-timed trade, the trading odds haven’t actually changed much. We know that 99% of day traders lose money, but they may deceive even themselves over their performance. A study out of Berkeley found that traders usually don’t keep track of their daily earnings, and fail to take into account trading fees and the tax implications.
With the entry of institutional investors, algorithmic trading and bigger plays into crypto, it’s going to be especially hard for a noob to have a fair shot on this battleground.
Traders get excited by the prospect of setting up four screens in their living room, staring at charts all day and recreating some crypto version of The Big Short.
But the best traders I know don’t day trade. They make a handful of trades a year — and sometimes it’s just one trade. This may sound boring, but in practice it requires a lot of discipline.
Would you rather make a handful of winning trades, live a relatively stress-free life and focus on bigger goals, or do you want to sweat a bunch of trades each day trying to time your entries and exits while sacrificing your mental health and relationships?
One problem is that people overthink each trade. They turn to what the crowd is doing and ask their crypto friends, who probably don’t know what they’re doing either. Heck, even Warren Buffet gets it wrong, so it can be confusing. But for certain, paying too much attention to talking heads and second-guessing your approach will result in poor choices, like selling too soon.
Making gut decisions can be avoided by following a few simple rules, which we’ll go over. Being on top of the news and checking crypto gains/losses on a frequent basis also is not necessary.
It’s possible to continue your day job, maintain a healthy life and jump into the crypto rabbit hole without FOMO (feeling like you’re missing out on all the action) — and of course, make money. Choosing and holding crypto for longer-term appreciation will require you to take a slightly different approach. But how long should you hold crypto? Holding some crypto long term like a value stock could reduce your risk and work out favorably from a tax perspective.
Once you’ve set your risk limits, for those who don’t have the time to get into crypto, but want a piece of the pie, you only need to spend a bit of time upfront and a few minutes a month to reap the rewards.
This article is geared towards beginners in crypto, but I think it can benefit even those who’ve been trading for a while and want to change up their style. Let’s jump into the alternatives to day trading and how to set yourself up to earn a steady profit in the crypto economy.
Strategy 1: Don’t Trade, Invest
I spoke to a hodler, James, who does not actively trade cryptocurrencies. He does research on projects once a month over a weekend and buys a few hundred dollars worth. He’s got a day job as a developer, which he enjoys, and doesn’t want to spend his time looking at charts. I think this is a skillful approach.
He bought Chainlink at 50 cents and then sold it at $15 after its recent rally, netting $12,000. He’s gotten “lucky” a couple of times profiting several thousand dollars without becoming overly fixated on crypto on a daily basis. While he can’t quite buy a Bugatti, he can pay bills for a few months, and put his earnings into savings or other investments.
The mistake many hodlers make is to hold onto a crypto even after making 500% or 1,000% gains because they believe “it can go higher.” But remember, what goes up must come down. And let’s not get too greedy here. Quintupling your money is already pretty good.
When you’ve made big gains, it’s always prudent to take a big chunk of your money off the table (converting into USD or your local currency) and let the rest ride — 20% or so — that way you still have a bit on the table in case it does something crazy like Ethereum back in 2017. “I make a promise to myself,” James told me, “That if any token goes more than 10x that I will sell 80% of my position. That way, there’s no regrets.”
How to evaluate projects
Now, you may be wondering what makes a good project. This is the fun part. Educate yourself with one of the myriad of courses out there like Blockchains 101, free courses at OKEx Academy, and read a few books about investing and crypto to get the basics.
Then you need to establish a framework for assessing projects, and stick to your framework. Most people don’t do this (even traders who have been at it for years), so by having ground rules you follow you’re already way ahead of the game.
You can use the Mosaic Method, which I discuss in detail here, and an application of this method and why I invested in ZRX here (nice to see it popping off recently!).
There are less time-consuming ways to assess projects, of course. Here’s a simple 3-pronged method that doesn’t require you to be well-versed in blockchain:
Market cycle: Has the project gone through a market cycle already? XRP has gone through a full market cycle (getting to $4 and back down to sub $1 and back into accumulation). Generally speaking, a project that has not gone through a full market cycle could eventually have its time to shine and thus has more upside. Here’s a detailed guide on market cycles.
Liquidity: Is the project trading on big exchanges with at least 3–4 million dollars in volume? If yes, then you should be fine. If not, you’re taking on a greater risk of not being able to pull your money out.
Product. Does it have a functioning and live product/service, or one that is about to go live? Explore the product and see what people are saying about it.
If you were to only assess projects based on these three criteria, you might have come across a project like Orchid (OXT), a blockchain-based VPN service, back in December of 2019 when it was listed on Coinbase. OXT was trading on Coinbase with steady volume and had not gone through a full market cycle. They had a product that was set to launch with a clear timeline. Buying this project a few months ago would have earned you a 5x+ return today.
Once you buy into a project and want to keep track of it, the easy way is to set price alerts, that way you don’t have to check prices frequently. The price alert will simply email you when the price has hit a certain number. Then you can log into your exchange to quickly sell and lock in your gains.
However, in a situation in which you’re traveling and don’t see this alert or simply can’t get to it in time (or don’t want to deal with the stress), another best practice is to set a limit sell order (or multiple orders) for the project you’ve invested in. The sell order will automatically sell once it hits a certain price, that way you won’t miss it in case it plummets back down. If you believe that Tezos is going to be the next Ethereum, set multiple sell orders between the prices of $8-$100.
The above technique is more investing than trading, and doesn’t require you to be a pro by any means in the technical sphere. But it does mean you need to have a basic understanding of how these projects work, how to use an exchange, and market fundamentals. Four hours a month to review your investments and research new projects should suffice. Meanwhile, setting sell orders and price alerts allows you to stay on top of things without becoming obsessive.
Lastly, there’s a lot more you can do apart from just hodling. Check out my book Bullish on Bitcoin to learn about staking, mining pools and 37 other ways to make money in crypto without trading. You only need to pick a couple.
Strategy 2: If You Are Gonna Trade, Take This One Simple Trade
For those who have a little more time to dive into the action, it’s still prudent to avoid day trading. Instead, focus on swing trades, which typically last several weeks/months. This will allow you to ignore daily/short term price action and focus on the bigger picture.
“Swing trading involves holding a position either long or short for more than one trading session, but usually not longer than several weeks or a couple of months. This is a general timeframe, as some trades may last longer than a couple of months, yet the trader may still consider them swing trades.”
Before playing ball with the big boys, would you go on the court with zero practice? Of course not. Even if you don’t have much money (or any money) to trade today, when you’re learning new trading techniques you should test our your techniques before going all in.
One solution is paper trading.
Paper trading allows you to trade Bitcoin and certain altcoins in a simulated market environment without the need to deposit real funds. While it’s not real money, it will familiarize you with the exchange you’re using, build trading confidence, and help you analyze any mistakes that you make along the way. Many exchanges have this feature, which you can access for free, and looks like this:
Once you have a paper trading account setup (get $50 in free BTC when you sign up with OKEx), start practicing with the following technique — the breakout trade — which will give you a higher probability of success. This approach doesn’t require you to use any complicated indicators. All you need to know is volume, resistance/support, Fibonacci extensions/retracements, and the basic market fundamentals of the project.
A breakout trade is one of the best trading patterns for beginners and pros alike, and one that I take constantly myself. My biggest trades in the past four years (Ethereum, 0x, Ripple, IOTA) were all breakout trades. It’s easy to spot on a chart and you’re less likely to hesitate on entering (and exiting) the trade.
A breakout trade happens when a project sees an increase in volume and then breaks a point of prior resistance. This creates even more excitement in the market, which leads to more buyers stepping in. In essence, it becomes a self-fulfilling prophecy and the price continues to increase.
A breakout goes through four steps and is easy to spot on a chart.
You see an increase in price.
Then there’s a pullback in price and usually lower trading volume.
The price consolidates. It eventually retests the resistance area.
The price breaks the resistance area and trading volume increases (this is where you buy). This bullish signal usually creates a cascade of buying activity.
Example: Tezos (XTZ)
If you look at the below chart, you can see an increase in volume and price for a few days starting before the breakout. It’s easy to miss this volume spike (which can come before the price spike), so you can use a tool like Digi Lit to set alerts for increasing volume for any coin.
After the volume spike, Tezos broke out of a prior high of $2.2 (indicated by the blue horizontal line) after several months of chopping around. Then, it dropped back down to around $1.90 for about 5 days and 20 hours.
At this stage, you might get excited and be tempted to buy when the coin’s price and volume are increasing. Be careful trying to anticipate a breakout here, because you can get burned or faked out. It’s much safer to wait for confirmation of the breakout, which happened once Tezos broke past the $2.2 mark again.
The beautiful part about this trade is that the pattern actually repeated itself twice (which doesn’t always happen of course). After the price hit $4, it crashed back down and then repeated its 1–2–3–4 breakout pattern several weeks later. In theory, you could have taken this trade twice and hit a 4x trade.
But in order to do that you need to answer an important question: when should you sell? Price action hits certain inflection points, which is most commonly identified using what’s called a Fibonacci extension or retracement (a great guide here).
Using these numbers, you can set yourself targets to sell. This is more of an art than a science, but many traders will sell around 1 and 1.618 as the ultimate take profit zone. Check out this video for further instruction on drawing fib extensions and retracements. Fib extensions/retracements are just guidelines, and it’s common to draw these in a few different ways and check for what’s called confluence.
Now, if your position has risen over 100% of your entry point, it’s always smart to take some profit off the table no matter what. Keep in mind that this 1–2–3–4 breakout trade is meant for short- to mid-term trading, and isn’t particularly useful for ridiculous increases like a 20–50x jump in price. You could hold a good chunk of XTZ for the long term because you believe in the project, but still make profit by trading it (using a separate chunk of cash) when it breaks out. It’s thus important to have multiple capital buckets — long-term holds, short-term trading capital, and other crypto income.
Final Tips
Long-time crypto trader Chris Dunn warns about the most common mistakes made by new crypto traders: over-trading, hesitating on entries, and closing positions prior to profit targets when the trade is still intact. As you observe your own trading behavior, keep an eye out for these big mistakes:
Over trading: Whereby you try to catch every single move. Looking at every indicator and every small movement in price as an indicator to buy or sell can take up your entire day. The solution here is to create a plan and write it down on a piece of paper, and identify your capital — as we discussed previously. Stick to the plan.
Hesitating on entries: This usually implies you are not confident in your plan for some reason. Maybe you need to do more research. Or, you could be scared because you’re taking too much risk. Put less on the table. And remember, you can lose on trades…as long as you win the big ones.
Closing positions prior to profit targets: This may not seem like a big deal, but you can leave a lot on the table here. The other side of greed is being too stingy. Keep in mind that new markets in crypto tend to blow away profit targets, so it’s usually a good idea to take profit along the way up, setting multiple profit targets. And even leave a little bit of a runner if you think the price action is very bullish.
Lastly, I’m reminded, time and time again, that impulse-control and mastering one’s mind is by far a larger factor in making/losing money than technical trading skills. One of my biggest lessons learned is that we are both Dr. Jekyll and Mr. Hyde. Spending time creating mental models and developing emotional discipline is half the battle.
Thanks for reading! Check out my weekly newsletter Bullish on Bitcoin for more crypto articles and tips.
What are the best valuation frameworks and tools to identify undervalued crypto projects? How do you make smarter investments and stop losing money? And what does Bruce Lee have to teach us about becoming better traders? I’ve interviewed dozens of investors, traders and entrepreneurs to ask them these questions and much, much more. From bounties to avatars that earn you tokens, Bullish on Bitcoin outlines dozens of strategies to trade, invest, create, and explore the new decentralized economy.
