Imagine you walk into a glitzy Las Vegas casino. The chandeliers are sparkling, you hear the clink-clank of coins, and there’s the incessant hum of excited chatter. Amidst all this, some folks are having the time of their lives, while others are pondering their life choices. Welcome to the world of trading! Well, metaphorically speaking.
1. Emotions vs. Logic: The Battle Royale
Trading, like our imaginary casino, involves risk. For some, it’s thrilling. For others, the very thought makes their palms sweaty. Your ability to manage emotions can greatly determine your success. Remember, the stock market doesn’t care about your feelings, and it sure won’t comfort you after a rough trade.
For instance, Vitalik Buterin, the co-founder of Ethereum, made a staggering 17100% profit on only one dogecoin trade. While these stories are exhilarating, they are outliers and should not set the standard for what you expect from your trades. It’s equally possible to lose everything in just a few poorly executed trades, as in the case of Bill Hwang who lost $20 billion in just two days. The balance between wins and losses defines your actual trading capabilities.
2. Research, Research, Some More Research, and… Did We Mention Research?
Successful trading is not just about buying low and selling high. It involves analyzing complex charts, understanding market dynamics, and staying updated on news that could impact stock prices. If you’re the type who skips instructions when assembling IKEA furniture, trading might test your patience.
Indeed, you can hit the jackpot and get really, really lucky – but that is different from how you will succeed over the long run. Remember this quote: “It’s not about timing the market, but about time in the market”. The more often you put all your money on a single trade, the higher the probability you might lose a big chunk of your portfolio. It does not take much to return from a 5% loss of your portfolio, but it takes a return of 1900% to recover from a 95% loss.
This phenomenon gets intensified when trading cryptocurrencies as many projects are not vetted and do not adhere to regulatory requirements. Hence, here is our tipp, especially when buying and selling coins that are not in the top 10 in terms of market capitalization.
“The vast majority of alt-coins are Degenerators. Their price chart has a measurable half-life, like radioactive decay. Plotted on a log chart, it’s a straight line down. This one is Namecoin, a promising coin of its era, there’s over 2000 examples like this.” – Willy Woo
So while a coin might seem very promising, it is essential to backtest your strategy if it works, so you’re not caught in the fake narratives of pump and dumps of the cryptomarket. In the best case, you see that your hypothesis is not working too well and you adjust. In this case, seeing that so many altcoins are actually not going to the moon, but rather to 0, you might profit from shorting overhyped coins.
3. Time is Money (Literally)
Active trading requires constant attention. The market can change faster than a chameleon on a rainbow. If you’re not keen on spending significant time monitoring and adjusting, trading might not be your gig. Others might compare trading to that high-maintenance friend. They’re fun and exciting, but sometimes you wonder if they’re worth all the drama.
Thus many simply go for a fool-proof strategy of index investing wherein you simply gain a small stake in the 500 biggest companies of the market.
“On average, the average large-stock fund manager produces average returns before fees and below-average returns after fees. So compared with after-fee returns, an index fund is superior.”
If you want to be an active investor, it would be wise to combine and use time-tested approaches like technical analysis, especially candlestick patterns, and fundamental analysis. Moreover, it might always be smarter to trade blue-chip stocks as there is more liquidity in the markets and you will not be surprised too often.
For crypto that means, while being a zealous “monocoiner”, aka. Bitcoin Maximalist might not be the optimal route, but the underlying principles can offer a layer of protection and a retreat into some sort of stoic trading. The mantra is simply, “just keep stacking sats”. For those embracing a multi-coin approach, spreading holdings across multiple exchanges can mitigate risks associated with a single exchange’s vulnerabilities.
“The culture around bitcoin is steeped in responsibility and self-ownership (“hold your own keys” & “not your keys, not your coins”), verification and reasoning from first principles (“don’t trust, verify”), long-term thinking and saving for the future (“stay humble, stack sats”), as well as a focus on hard work, integrity, truth, and visible outcomes (“proof-of-work”).” – DerGigi (Bitcoin Maximalist)
4. Capital: More than Just a Fancy Word for Money
You need money to make money. But remember, there’s no guarantee of returns. If the idea of losing some (or all) of your hard-earned cash gives you sleepless nights, perhaps consider a safer investment avenue. Think of capital like chips in our imaginary casino. Sure, they’re shiny and promise fun, but remember, the house always has an edge.
While you might amplify your returns, you can also lose your entire capital due to unforeseen market movements. As you can see from this example on Reddit, a trader lost $450.000 in 4 Days as he did not anticipate the crash of Lucid (LCID). In this case, he traded approximately 2.5M on margin and 7x leverage.
5. Stress: Not Just a Five-Letter Word
Finally, and perhaps one of the most obvious ones – not everyone want to be in the daily storms of the market. For many people it is just stressful to be exposed to such a risk. For others, it is a thrill, the adrenaline rush you get from all the market movements, on the lookout for the next big trade. This obviously also attracts a certain kind of persona to the craft, often people who seem close to gamblers.
“it would appear that most individuals who engage in day trading are heavily involved traditional gamblers who include day trading in their repertoire of activities”. This was also underpinned by a UK residents’ survey, where almost a third admitted their crypto purchase was more of a bet than a business (FCA, 2019).
In Conclusion
Trading can be exciting and rewarding, but it’s not for everyone. It requires a blend of emotion management, dedication, research, capital, and resilience to stress. But if you decide it’s not your scene, that’s okay. There are plenty of other financial avenues to explore.