The cryptocurrency market is often called the “Wild West”, mostly due to its seemingly lawless nature (although regulation has quickened pace more recently). At the same time, this new space which brilliantly merges applied digital cryptography with economics may resemble the gun-slinging days of Billy the Kid in the area of trading and investing as well.
Since crypto is such a young and developing market, with its 1000 percent gains and the like, it can exude an aura of “easy money”, leading people to dive into the market head-first without a plan. However, having a trading plan in crypto is vital – especially one that is specific to each trader or investor.
A tough game
Crypto trading is a zero-sum game. There must be winners and losers. Every winning trade results in someone else losing money. Having a plan can help traders or investors have a better chance at success, instead of just rolling the dice and leaving it up to chance.
The crypto market is a zero sum game. Your profit is someone else's loss. We are not Robin Hood's or Angel's of Mercy. We are not standing up for the poor, not building a better world – that's what the developers do. In the Market we are Pirates. We take. Time to get real.
— John McAfee (@officialmcafee) November 25, 2018
Just because someone randomly threw $1,000 into the crypto market and ended up with $10,000, doesn’t mean the same will happen to everyone who takes a similar gamble. Trading and investing are largely about playing the odds – and randomly buying assets does not likely lead to the best odds.
Longevity in trading and investing is often about consistency. Making a huge one-time profit is not effective if that money is later lost to the market due to a lack of consistency.
Financial service veteran Michael Carr once gave a wise and applicable quote that can be used for the creation of a trading plan. “Don’t worry about what the markets are going to do, worry about what you are going to do in response to the markets.”
No amount of willpower can entirely control the crypto markets. Markets have a mind of their own. That being said, the trader or investor is still in control of his or her own actions, and how to play the market in order to find success.
Rockwell Trading listed a good example of some points to consider when developing a trading plan.
Points include evaluating:
- “The market(s) you want to trade.
- The timeframes you want to trade, e.g. 5 min, 10 min, tick or range bars.
- A brief description of the strategies you want to trade and when to use what strategy.
- The entry rules of the strategies.
- The exit rules of the strategies.
- Other important rules, e.g. when to trade and when not to trade.
- The money management approach you are using.”
(These points are also sensible for investing, but would need to be applied to a much longer timeframe.)
A custom plan
An aspect that makes trading and investing so difficult is that what may work for one person, may not work for the next person. Each individual has different biases, tendencies, tolerances, emotions, and capital allowances.
Notable fund manager Richard Driehaus once said, “[a] trading philosophy is something that cannot just be transferred from one person to another; it’s something that you have to acquire yourself through time and effort.”
In his book, Trade Your Way to Financial Freedom, author Van K. Tharp noted, “[m]y understanding has always been that you cannot trade the markets. Instead, you trade your beliefs about the market.”
Tharp’s quote is another good example of why trading and investing plans differ from person to person. Such plans and experiences are largely an exercise in self-discovery. Each person is subject to their own biases, beliefs, etc. It is important to develop a plan that provides consistency according to the individual trader or investor.
How does it all relate to crypto markets? Crypto markets are in their infancy, riddled with volatility. When this volatility is to the upside, it can create stories of tremendous profit. Fantastic stories filled the media with random crypto assets rising by thousands of percents during the last bull market.
These stories logically had a higher chance of luring unprepared people into the markets, than stories of common stock market successes. There is a large amount of risk if those investing or trading have early success attributed largely to luck. Without a plan, the odds could point to losing such gains in the long term.
There have been stories of people putting enormous amounts of money into crypto (money they could not afford to lose), buying the top of the market last December, as well as this year in January. This put them in a difficult position due to 2018’s bear market.
The New York Times reported on one individual who invested $23,000 into cryptocurrency markets during the hype. As of the August report, he was left with $4,000. “I got too caught up in the fear of missing out and trying to make a quick buck […] The losses have pretty much left me financially ruined,” he said.
Having a trading or investing plan can potentially help better prepare those involved, possibly leading to greater long-term success.
*Nothing written or said is financial advice in any way. Nothing written is any kind of advice whatsoever. Proceed only at your own risk after doing your own research. Trading and investing are highly risky endeavors.
*CryptoInsider is sponsored by Blockmodo. As part of our arrangement, we may occasionally link to them and quote them when appropriate. This is done at the discretion of CI staff and CI sponsors have no say in any editorial decisions made by CI.