Whether Trading or Hodling, you are essentially betting that you will be able to sell a cryptocurrency at a higher than the point at which you bought. You might flinch at use of the word ‘betting’ but trading is a form of gambling.
The trick is reducing it to a skill-based decision – through a structured approach – and tilting the odds/risk in your favour.
If you simply open an account with an exchange and place trades based on nothing but instinct, or a random tweet you read, it becomes a luck-based process.
You may as well be flipping a coin, except that the odds will be against you (as will be explained) and you will almost certainly get burned.
You can think of learning to trade like learning to play poker. You face a steep learning curve with the likelihood that the experienced players will take advantage of the novices.
This is known as the Pareto Principle – the majority of profit will be generated by a minority of participants. The learning curve gets steeper in relation to the potential returns.
You need to have your eyes open and feet on the ground to stand any chance of being successful, especially if you want to trade rather than invest. The majority of traders blow up in their first year, and that isn’t just because they fail to understand the basics of how to trade cryptocurrency and the Pareto Principle, it is because they fail to understand themselves.
Trading requires knowledge and mathematical discipline – crunching numbers and trying to find an edge against the market – but just as important is having clear objectives and psychological discipline.
You cannot expect to buy at the exact bottom and sell at the top. This tweet summarises how fleeting the highs of the Bitcoin market have been.
Instead you need to set realistic expectations, and if you start active trading, record your actions in something called a Trading Journal.
Psychological discipline starts with being honest with yourself about what you are trying to achieve and how – a Trading Journal plays a key part in that. As a complete novice, the likelihood that you’ll become rich overnight is tiny, the equivalent to winning the lottery. So start with realistic expectations.
If you were learning to drive a car would you just follow a few online tutorials then hit the motorway? Trading, like learning to drive a car, is a risky activity that requires the right kind of preparation.
A successful trader will be happy simply making a return above what they could derive from their capital otherwise – the opportunity cost also known as discount rate.
They are not looking to knock it out of the park with every trade, and many of their trades will end with a loss. You need to be able to understand and accept that.
If you feel uncomfortable making losing trades and overcome by a desire to try and immediately regain losses, you aren’t cut out for trading (or any other form of gambling).
It is equally important to separate luck from skill. Being on the right side of a trade doesn’t mean you’ve cracked it, unless you can satisfy yourself that you weren’t just lucky. It is very easy to post-rationalise a trade and attribute success to your approach rather than simply being lucky.
If you put enough monkeys in front of a typewriter one of them will eventually produce the Bitcoin Whitepaper. This doesn’t make them Satoshi Nakamoto. It’s called Survivorship Bias and the same applies to trading. It is one of a host of behavioural biases that impact effective decision making and can lead to failure.
As we’ll see later in the section, there are different types of Trader, the key differentiator is the amount of time you are able to dedicate to doing proper research. Your trading frequency should be in direct proportion to the time you can dedicate to analysis.
If you haven’t been put off by that bucket of cold water, the next article will explain where cryptocurrency prices come from.
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