“Fate does not always let you fix the tuition fee. She delivers the educational wallop and presents her own bill, knowing you have to pay it, not matter what the amount may be.”
-Edwin Lefevre: Reminiscences of a Stock Operator
Have you ever been long a big position and watched it drift down into oblivion?
It was only dropping a little each day…and then one day, you realized those little drops had become a river of money cutting a giant canyon through your account.
Or maybe you did some careful analysis and had a trading idea all mapped out…but you let somebody talk you out of it, only to watch it soar.
Every trader will eventually accumulate scars and pay a great deal of tuition. Those scars and tuition eventually form into rules or principles.
Through slumps and periods of profit, trading rules provide guidance on what to do in situations that you will inevitably see over and over again.
Now, if you’re starting out, you may not have any rules of your own yet. Traders of old would borrow these rules from their mentor until they could form their own.
You may not have a mentor, or enough scars and tuition yet, so if you are looking for some trading rules as a guide, borrow these.
Make a trading plan even if it’s a loose one
Mike Tyson said that everyone has a plan until they get punched in the face. And yet, the easiest way to get punched in the face as a trader, is to get deep into the game without a plan at all.
Different types of traders have different kinds of plans. Even if you are a highly discretionary trader, writing down the types of patterns you are looking for, or the conditions you plan to exploit is helpful.
Understanding what you are doing and when cuts down making decisions in emotionally charged situations. It provides a guide when you are confused or unsure.
Trading plans help you figure out what you did well, what you did poorly and alternative outcomes. It will help you hone your crypto trading decisions over time.
Protect your capital
Trading without appropriate respect for risk and money management will eventually knock you out of the game. The game requires capital to play.
As they say, it takes money to make money. So if you lose all your chips, you can’t play tomorrow.
Think for yourself
Every trader has a story about how they let someone talk them out of an idea that took off and left them behind. Of course, blaming the other guy is a convenient way of avoiding responsibility.
It’s a trader’s version of the victim card.
Now the solution to being talked out of a great idea is to do your own analysis and have conviction. If some clown on social media that you don’t even know can talk you out of your idea so easily, it means you didn’t have conviction.
Thinking for yourself and developing your own thought process is a key rule for every trader.
Take responsibility for your results
Closely related to thinking for yourself is owning your results.
If the losses are due to scammers and winners are due to your brilliance, you have a problem.
All results are information, and each decision you make requires a commitment and accepting responsibility for the outcome. Good or bad.
In your account, you alone own your gains, and your losses.
Avoid taking tips
Have you ever had a trader who claimed to have made a stack start telling you how, when, and what to trade?
It happens all the time.
There is always someone with a hot tip out there.
It’s going to go!
Don’t miss out…
When you are taking tips from people, you are relying on their judgment and thinking. And there may be no judgment or thinking behind the recommendation at all.
But there is almost always an underlying motivation, because every bit of outside advice on a trade has an underlying motive.
Why, for example, would someone share something so valuable?
Are they long?
Or are they offering their position while trying to get you to buy from them?
Do they need you to be their security blanket? You know, hold their hand by being in it too?
Are they seeking notoriety?
What do they expect in return?
Or do they know something they shouldn’t and could they be putting you at risk by sharing it with you?
Even more important, if you are following their thinking, how do you know what to do next? Because when things go wrong, they won’t have an answer for you. And they won’t share your losses.
Traders that own their results don’t take tips.
Do not trade to pay for something
When a trade follows a defined process, even if it’s a loose process, you are objective and can make rational decisions.
But when you decide to trade to pay for something, you are now removing objectivity. It’s no longer a process. It’s a statement. It’s ego.
It’s even worse: it’s neediness.
You need the trade to work to buy the car, boat, house or a swanky vacation…the goal becomes an emotional decision. After all, what you really want is to be able to brag about the result.
Neediness is an extreme emotional behaviour that kills results in every decision making process.
The fastest way to lose money trading is to start trading to pay for things.
No one trade is that important
This one is a close cousin to not betting the farm on any one idea. Think of each trade as an experiment where you receive valuable information.
The information tells you about market conditions, market participants and your thought process and trading strategy.
If every trade is simply information, it means that no one trade is that important.
The less importance each trade has, the lower the risk of emotional decisions.
Cut back or stop trading during emotionally charged personal situations
Things happen in life outside of the market, and sometimes those situations are disruptive.
You might experience a death of someone close to you.
Or have a breakup.
You might have a new baby at home and your sleep is way down.
You might have other stressors due to injury, a car accident or something else.
Any time you experience a highly charged emotional situation, scale back your trading. Either reduce your size or cut back your activity temporarily. Watch your thinking in your trading journal to see if you remain on track. As the issue passes, adjust activities to normal levels.
Fear of missing out is real. But what’s actually worse is having an idea, failing to execute and watching it take off like you expected.
Don’t chase something because it’s moving. Stick to your plan and strategy. Bitcoin will be there tomorrow.
Get back to the basics. What does your analysis tell you? What is the next step?
Then make a decision.
Someone has to buy the top, and someone has to sell the bottom, but that someone doesn’t have to be you.
When your head is in the mixer, make a sacrifice
The mixer is that place where you are stressed about a situation and you don’t know what to do.
Indecision might mean you are confused about conditions, a position or overwhelmed with emotion. The way to snap out of it is some small trades.
Missing a move to the upside but don’t want to buy the top?
Buy a small amount to relieve the pressure.
Long a losing position but your stop loss point hasn’t been touched and tempted to sell?
Make a sacrifice to the trading gods by selling a tiny portion. Taking action with a small sell will free up your mind and move you back into rational mode.
The way out of the mixer is small actions designed to reduce stress and free up your mind.
Never let a trade become an investment
If you’ve even entered a trade and it suddenly did something you didn’t expect, what did you do?
Follow your plan and sell when the stop loss was met?
Or if you don’t have a plan, did you sell and reevaluate?
Or did you hold it and start referring to it as an “investment”?
A trade should never turn into an investment because you didn’t follow your plan, or didn’t have one in the first place. Not “booking the loss” doesn’t make it less of a loss, and it certainly shouldn’t make it an “investment.”
When a trade “becomes” an investment, you are creating internal conflict. You know you made a mistake. You know it’s really a loser and you are now emotionally invested in the position.
That lack of objectivity means an increase in emotional behaviour and decision making.
A trade that becomes an “investment” is another name for a loser.
Your research should be done before, not after the trade
How do you know your trade is becoming an investment?
Well, the first indication is that you are doing all kinds of research to try and justify holding a loser.
If you are frantically looking for reasons to “prove” you are right about the trade when it’s going against you, you are expressing neediness.
Neediness is a dangerous emotional state for any trader.
Avoid the need to be “right” and focus on being profitable by doing your research before the trade.
Never add to a loser
There are terms like dollar cost averaging, if you liked it at x, you will love it at a lower price.
Now, dollar cost averaging is fine if that’s part of your entry strategy. But it’s not good if your stop loss got crucified, and you are now “averaging down” because you didn’t sell.
Adding to a loser often compounds the damage for individual traders. It creates an unnecessary emotional burden and it will ramp up the stress.
Avoid excessive highs and lows from wins and losses
In the book: The Hour Before Dog and Wolf, Coates looks at the psychology and emotional behaviour of traders in extreme conditions.
When the market is bullish and strong, you’re making money, and your confidence increases rapidly. As confidence rises position sizes expand, research becomes loose, and risk management tends to get lax.
When your emotional state is at a high, and your confidence is greatest, that is when you are most vulnerable.
On the downside, losses lead to a reduction in activity and size. Depression can set in. And these negative behaviours can spiral resulting in inactivity, right when you need to be bold.
Things are never that good or that bad.
Using a process instead of attaching your heart to every trade will keep you from getting emotionally exhausted by the ups and downs of the market.
It will also help you profit by rationally acting contrary to emotional extremes by others.
When you feel giddy, sell some
Your position is working. You feel like a genius. And you are thinking about all the cool stuff you can do with your new “wealth”…
This giddiness is a warning sign.
The minute you feel this way, go to your terminal or get out your phone and sell a bit of your position.
Everyone is giddy near the top.
Don’t pick tops or bottoms. Take the meat in the middle
Picking tops and bottoms in a market is an old pastime of your typical market participant.
But with your own money, don’t be seduced by the need to be right about the tops and bottoms in the crypto market. Trying to buy bottoms and sell tops is a very expensive pastime.
By making the call, you will put yourself in a position where you need to be consistent. And that means abdicating your decision to your big call or be called out.
These calls are almost always wrong.
Instead, follow your plan and quietly feast on meat in the middle of the move.
Opposing analysis can be valuable
Your conviction in a trade or position should be a product of observation, thinking and analysis. That means that you should be receptive to opposing analysis.
Sometimes opposing analysis will see something that you won’t. Or maybe you will discover that they missed a key insight.
Most people look for things that confirm their beliefs. They can’t think critically about opposing opinions even when they are valid. And that is a dangerous problem to have.
Be aware of alternative ideas to your position, and avoid the lethal combination of comfort and confirmation bias.
No position is a position
You don’t have to trade every day, every week or every minute.
Sometimes the best trade is no trade.
So there are really three trading positions: long, short and flat.
Sell when you can, not when you have to
In liquid markets, you can add and move large positions with ease. When times are good, spreads are tighter, slippage is lower and positions move like water.
But when trouble comes, spreads widen, liquidity dries up and selling even smaller positions can become hazardous. Modest positions can receive significant haircuts if you are forced to sell.
This is especially relevant when you are thinking about a large position in an illiquid asset, cryptocurrency or token.
The Great Financial Crisis in 2008 and Long Term Capital Management in 1998 are great examples of the importance of this trading rule.
So the size of your position in the context of market conditions is an important consideration. Always.
Stories are just stories
People love to brag about their wins and that can be infectious. It can also be a dangerous thing to emulate.
Many times you end up comparing yourself with stories that are only partially true (or completely false). You rarely ever know the full truth behind these stories and claims.
Stick to your own game and process.
Keeping up with other traders can be emotionally draining and will interfere with your long term development. And if anything, you should do the opposite, and complain about your losses to throw off your competition.
The winning side has a bit of faith attached
Everyone is obsessed with facts these days, but in a market environment, the profitable side is often a little less specific. The analysis is there, but it has an air of faith about it.
The losing side always seems to be meticulously detailed and deterministic.
Since we know that nobody can reliably predict the future, always be cautious about charismatic people bearing gifts of “guaranteed” outcomes. This applies to both the up and downside.
Do not use more than (x%) of resources on any one trade
The amount of resources you use for any trade is contextual.
A systems trader may choose a probability based amount where the higher the probability, the higher the resource allocation. Others might choose a fixed amount per trade or a percentage of assets.
There may be a trend following approach where leverage and pyramiding of a position is used.
If you are starting out and have a small account (but it’s all play money) that percentage might be very high…or all of it.
Whatever amount you choose will be related to your risk tolerance, and how you plan to manage the risks associated with each position.
There is no fixed trade amount or percentage, but a defined amount based on a clear decision process helps you manage risks.
A crypto asset doesn’t know you own it
No asset you own knows you own it. Not your condo, your house, or even your jean collection.
It won’t care if you sell it. Why do you?
Small adjustments in trading strategy are better than large ones
Your trading approach will inevitably go through periods of underperformance. There can be various reasons for this.
But if the approach has proven to be sound in the past, it may require some small iterations to get you back on track.
Big changes in trading approach, or completely starting over can create mental and emotional chaos. And the more significant the changes, the less likely you are to understand what the problem was.
Keep your trading iterations small and do them one at a time. This will reduce emotional problems and help you work through difficult periods.
Borrow and shape
Trading rules are ideas and principles garnered form market experience. The longer you trade crypto assets, or any asset, the more you will see places where various rules apply.
They become shorthand for situations that you will experience repeatedly over time.
Over time some of these rules may become part of your trading rules. Or maybe you will adjust some of them to your personality and approach. Remember, you can have any rule or principle you want, but they should be clear and relevant to your activities.
Nobody can predict the future reliably, but by using the lessons of your past, you can focus on being more profitable and make better decisions in your crypto trading future.
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