Hello and welcome back.
So far in this series we have discussed:
- What crypto is
- Why your back up plan during the changing world order should include some crypto
- Intrinsic risks to investing (fighting your biases)
- Extrinsic risks to Investing (ponzi’s, volatility)
- Institutional Investors and how they affect asset price
Now that we have made it through an overview of the benefits of crypto along with 3 chapters on risk, I am going to finally show you my simple trading protocol that sidesteps the risks we have discussed so far while enjoying the benefits we saw in the beginning.
Setting a Goal
The best method for avoiding the destructive nature of Emotional Trading (which happens to Gamblers and Risk Averse traders alike) is to set a concrete trading/investment goal.
If you need to be at a Coffee meeting at the Starbucks on 10th street at 1pm sharp on Thursday the 21st, you should probably use your car to get there. You should also make sure you have the gas you need to get there safely, and use a GPS to avoid unexpected traffic.
If you want to go to the biggest coffee shop in the world, at some point, and you aren't sure where it is… well I suppose you can drive around aimlessly for the next 3 weeks hoping you arrive on time, but ultimately you will probably spend a lot of unnecessary money on gas and auto expenses. You may even blow a tire, or wreck your car once the exhaustion sets in from driving for weeks at a time.
Without a specific goal or reason you are investing money, you are likely to blow up your trading account.
Gamblers will decide they want to drive cross country from Florida to California, will refuse to stop driving until they get there, even if their tires pop and they spend the rest of the drive doing irreparable damage to their car. They will also constantly look for shortcuts to get there quicker, but without a map they will take the wrong road over and over, resulting in a longer trip (A trip that lasts only as long as their gas budget does).
Risk Averse traders will decide to drive a shorter distance, but only so long as no wear and tear happens to their vehicle. the second they think their tires are wearing down a little bit, they stop their roadtrip. Instead of investing in good insurance, they will panic when anything unexpected happens. Many will give up all together and head home with less gas than they left with.
Maybe you have already dabbled in crypto investing, or stock market trading. Apps like Coinbase and Robinhood make this super accessible to the likelihood is high. Did you do our homework from part 4 and consider your relationship to money in general?
If so, you will likely relate to one or a mixture of both of these two trader types. Take note of this, knowing is the first part of the battle. You will have to fight your natural inclinations at one point or another.
Regardless of if you fall into the Gambler camp or the Risk Averse camp (or somewhere in between), You need to set an investment goal to avoid emotional trading.
You will need a goal not just on your overall portfolio, but also on each trade you make.
If you bought Bitcoin today, how would you know when to sell it?
How much profit do you need in order to sell?
what if the price goes against your wishes? how will you know when to sell?
Lets say you buy $1,000 worth of BTC and you decide to sell it once it is worth $1,200. That's a 20% return which is absolutely fantastic. that is a goal you can stick to. the important part is to have some sort of plan. once my investment has grown by 20% I will sell X%. if my portfolio drops by 10% I will sell X%.
There are advanced strategies for determining price targets, when to pull profits on a trade and when to sell at a loss. I will give a cursory overview of that next week. For now the important part is to have some sort of goal. Do not invest money without knowing when you will pull it out (for better and for worse).
Never press the buy button without answering these questions:
- When will I sell this asset for a profit?
Do not be vague here. what is the exact price you are going to sell at and why? next week I’ll give you some tools on setting price targets more specifically.
- When will I sell this asset at a loss?
even advanced traders are wrong very often. there is no certainty in trading assets. You need to have a plan in place. What is the exact price you will sell at, and how much of a loss will you sustain?
- Write this plan down, and follow it to the letter.
You will be wrong, a lot. That is fine, you are managing your portfolio. you are choosing to lose $200 instead of risking infinite loss (which is possible). if the asset rises after you sell at a loss that is fine… let it reset, and check in on it later.
The goal of trading is not to be right; it is to minimize loss. Gaining money is secondary to not losing money.
Think of it this way: if you have a trading plan that has a 50% win rate, but your loss target is always lower than your profit target, you will have a profitable trading portfolio over time.
If your strategy wins 50% of the time and you have no loss targets, you will almost certainly have a losing portfolio over time. Your average losses must be less than average wins.
To visualize this, lets look at 6 trades with a 50% win ratio with $1,000 in capital:
trade 1: $200 win
trade 2: $150 loss
trade 3: $250 win
trade 4: $100 loss
trade 5: $50 loss
trade 6: $100 win
Net profit = $250. Your win rate is 50% (half the trades lost, half won), but your net profit on all 6 trades is 25% because the losses are kept smaller than the wins.
This type of trading requires incredible conviction and discipline. While it seems easy when laying it out on paper, in practice it is very difficult. I am going to recommend a much less risky long term strategy here, but I wanted to explain the rationale behind my trading system: it applies to long and short term trades.
My experience has been that it is best to stick primarily to the framework Below. the goal of this is to alleviate the risks of emotional trading, and nuking your account by trading haphazardly.