How to become a better trader is one of the most common questions in crypto. 99% of people lose money trading. This is largely because of a lack of proper frameworks & trade management. This article will make you a 10x better trader.
First rule is to survive
Crypto disproportionally rewards people who stick around. Even mediocre traders who stick around have been making a lot of money. You need to ensure that your experiments as a beginner trade don’t take you to 0.
As long as you don’t go to 0, you can:
- Experiment & find edges
- Act quickly on those edges
Your biggest winners are likely going to come from a handful of trades. You need to ensure you’re in a position to act on them. Never risk your ability to take a risk.
Invalidation
When you take a risk & make a trade, you do it based on some sort of idea that you have. Your idea or thesis should be falsifiable.
There should be some data other evidence that invalidates your idea. Invalidation is when your idea is (almost) certainly wrong. You should be able to articulate what your invalidation is. If you can’t think of one, you should reconsider.
Invalidation is usually the product of the idea itself. The invalidation is usually derived from the idea itself. It is very closely related to the idea.
Here is an example:
Say you decide to buy BTC because the it hit the line of support. The invalidation should be related to the line of support of BTC. There should be a clear link between this reason and the invalidation. Have a look at support and resistance basics here.
If you’re a beginner, Think hard about your idea & invalidation. Make sure they’re related. Here some of the different types of Invalidation:
- Price Based
- Time Based
- Volatility Based
Price Based Invalidation
Thats easy, let’s say that $100 is the line of support for BTC. If BTC drops past $100 & it fails to act as the support, then your idea is invalidated.
Time Based Invalidation
Let’s say you think BTC is on the verge of a breakout if the price consecutively increases by 5% If it doesn’t increase by 5% on a certain day, your idea is invalidated. Or maybe you think the price of a coin will increase by 5% after an announcement. If it doesn’t. your idea is invalidated.
Stop Losses
A stop loss is an order placed with the exchange to buy or sell an asset when it hits a certain price point. This is often done to mitigate losses by having the exchange immediately sell a coin when it falls to a certain price point. Read more about stop loss here.
Not all trades have clear stop losses. There are two types of stop losses:
- Market Order: guarantees execution, often comes up with a higher price
- Limit Stop: conditional order, doesn’t guarantee execution
Beginners should usually go with market orders. Market order = guaranteed execution If you choose a limit stop and it doesn’t execute, you’re screwed. Where should you place stop orders?
Let’s say that $100 is the line of support for BTC. If BTC drops past $100 & it fails to act as the support, your idea is invalidated. Your stop loss would be at $100. There isn’t always a clear place to put it. If you’re not sure, it may be a good idea to skip the trade. Stop placement is linked to your idea. Bad idea = bad invalidation = bad stop placement = crying
If you don’t know where to put a stop, often your idea isn’t developed enough.
Strictness with stops
If you’re being precise with the trade, your stop placement should be strict & precise. If you’re being less precise ( trading over a wider time frame for example) you can afford to be a little less precise.
Hard Stop
A Hard Stop is a market order that completely closes the position at a certain price. This is usually useful when dealing with:
- Clearly defined set ups
- When Entry is close to exit
Beginners should stick to Hard stops
Soft Stop
This is more of a mental stop or reminder that signals you to start closing a position once it reaches a particular price point. Let’s say the price of eth is bouncing back and forth between $100 & $200. Once it hits $200, you slowly start selling. Stop softs take more experience & skill Beginners should focus on hard stops Good stop placement takes some practice. Play around with them & use hard stops, you’ll learn a lot. Here is a great article that dives deep stop placement
Position Sizing & Risk per Trade
Position size is the number of units of an asset bought or sold. e.g. 100 ETH Risk Per trade is the % of portfolio lost if invalidated & stops are triggered. Using the Invalidation to find Position Size It’s straightforward to find the position size you want to take if you’ve the invalidation point. Position size = ( Portfolio x Risk % ) ÷ Distance to invalidation.
- Position size – Number of units to trade
- Portfolio = total trading capacity
- Risk % = % of Portfolio at risk (decimal)
- Distance from Invalidation = Distance between Entry & Exit (decimal)
Let’s use an example:
You’ve a portfolio of $10,000. You’re looking to buy eth. You’re risking 2% of your portfolio. The invalidation is 5% away from the entry. Position size = ( Portfolio x Risk % ) ÷ Distance to invalidation. Your position size = (10,000 x 0.02) ÷ 0.05 Position size = $4,000. You should buy $4000 worth of ETH, this doesn’t include trading fees.
All trades are not equal Some trades have higher upside, more risk. Some less risk The expected value for each trade is different. For positions where the odds are more favorable, you’d want to take more risk.
Risk Frameworks
Risking 1% for high reward trades & 1% for low reward trades doesn’t make sense. This is why fixed risk per trade isn’t viable.
- The Expected Value (EV) or average outcome
- The odds that you → 0 if you lose on similar setups repeatedly
- Risk less on shit that happens a lot & has a small edge
- Risk more on shit that happens a lot & has a clear edge
- Risk big on shit that happens rarely & has a big edge
Plays with the best edges don’t last long enough to be tested thoroughly.
I HIGHLY recommend you go watch . So many insights that you should hear from him.
Streaks
Let’s dive into winning & losing streaks
Dumb shit to avoid when winning/losing streak:
- Risking more to losing to make it all back
- Risking more on losing setups when other setups are doing well
- Risking less when winning because karma/humility. Winners don’t last long. Milk them.
- Risking less on winning setups after a losing streak
Smart shit to consider:
- Which setups are working well? Which aren’t?
- If something is working well, trade it more frequently or increase size ( start with trading more frequently)
- If something is not working well, be more selective with those kinds of trades.
- If you have a short edge that suddenly stops making money, move on, it’s done.
- Short term streaks don’t mean the setup is good or bad. You can make money on bad trades, but it’s not sustainable. Think about the big picture.
Shit happens. Be quick on your feet & be nimble. Don’t trade when you’re triggered, be analytical. Keep a trading journal.
Break even stops & partial profits
A lot of impulsive profit taking & breaking even is for psychological comfort. Decisions should never be arbitrary. It should be rooted in reason & stem from the trade idea. Arbitrarily moving stops & profit taking is NOT risk free. You’re sacrificing the potential gain from your initial trade idea. Let’s say you place a breakeven stop at your entry after moments after entering because you’re scared of losing your money. According to your initial idea, you were happy to buy in at this price point. However, you got scared & place a stop at your entry. Nothing much has changed since you entered. This shows a lack of conviction in your initial idea & a lack of trading discipline.
Similar case with partial profit taking.
- If there’s a reasonable reason, like evolving R, it may make sense to take profits.
- Otherwise, you’re probably better off letting your trades play out according to your idea.
Manage your trade according to objective data & reasons. Even if you’re losing, you’ll be able to learn from it. Be process oriented.
Intro to Leveraged Trading
Leverage Trading involves putting up a fraction of the position size as collateral & borrowing the rest from the exchange. You want to $10k worth of ETH. You put up $5k USD as collateral & levering your 5k 2x. It’s a form of borrowing money. Liquidation is when your position is forcibly closed when you run out of collateral to maintain the position.
Two types of liqudation:
- Position is closed
- Your trading account as a whole is closed
Your PnL (profit & loss) doesn’t depend on how leveraged you are. It doesn’t matter if you’re 2x or 5x. Your PnL is dictated by your position size. The leverage only talks about how much collateral you put up. Low leverage: You put up more collateral & liquadation if farther away from price. High leverage: You put up less collateral & liquidation is closer to the price There’s a lot more to leverage, this is just an intro here. Beginners should stay away from leverage, there’s a steep learning curve.
Crypto specific considerations
- Some Key Correlations
When BTC & ETH go down, everything else goes down with them. There’s a strong positive correlation. - Diversification in crypto is more complicated. Holding alt coins in different sectors doesn’t mean less risk. They all go down with the blue chips. Fewer, higher quality trades is often better than a basket of “diversified” coins.
Exchange & protocol risk
- Exchange downtime is common
- Protocols can always rug
- Scams are common
Diversifying in terms of using different protocols & exchanges is a good idea.
Security
- Don’t lose your hard earned money. Practice good security
- 2FA
- Hardware wallets.
- Don’t click on random links
- Spend time learning about wallet safety, getting your money stolen sucks.