how to become a better trader

How to become a 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 Cred ’s video on this. So many insights that you should hear from him.

Streaks

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

Intro to Leveraged Trading

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.

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