Many people seem to have a common mentality when conducting transactions, that is, when they decide to purchase or buy a certain token, they only consider to what extent the price of the token will rise, but often ignore the possibility of its price developing in the opposite direction (falling).
For example, some people buy a certain currency at $1, and then they will be immersed in the fantasy of earning $10, $20, or even $100, which will give them a false sense of pleasure, and this feeling will often hinder their rational judgment and thinking. Once the price of the token starts to move in the opposite direction, they will be afraid and choose to sell at a loss, and then their principal will be exhausted in such fantasies again and again.
So, if you want to participate in trading, the first thing to do is to get rid of the above fantasy emotions. So how to do it?
1. Set profit and loss targets
No one can accurately predict the top and bottom of the market. Especially for short-term trading operations, it is very necessary to set strict take-profit/stop-loss targets, which is also one of the basic trading strategies we mentioned before.
For example, if you buy a certain currency at $10, you should prepare two plans before buying:
The first is a profit-taking plan. For example, you can set the profit price target for this operation to $12.
The second is the stop loss plan. For example, you can set the stop loss price target for this operation to $9.
In this way, you can have a clear understanding of this transaction psychologically, rather than just immersing yourself in the fantasy of making money. In other words, you need to consider both the profit opportunities and the possible risks. If you can accept the possible losses, then you can do it. Otherwise, just keep your hands off and continue to pay attention and learn.
Of course, the above example is just the simplest logic and thinking from a general perspective. If we expand it further, it may be divided into two different situations:
One is the difference in the amount of funds. For example, if you invest $1,000 to make a deal, or $100,000 to make a deal, the risks you may take are also different.
The second is the difference in investment portfolios. For example, if you invest $1,000 in this transaction, but this is only 1% of your total position, then this risk is also low risk for you. At least in my opinion, if at least 50% of your position is invested in BTC/Ether, and then take out 1-10% of your position to seek those Alpha trading opportunities, your overall risk is completely controllable.
But the reality is that this approach is easy to understand, but it is not easy to strictly implement. Moreover, many people are always used to finding excuses for themselves. For example, some people like to All In on various on-chain meme, and the goal must be at least 10 times, and they will not consider the issue of stop loss at all. The reason they give is that their capital is small, and only in this way can they have a chance to make money.
Remember in the previous article, we also shared the difference between different operations: gambling is mainly aimed at some MemeCoin-like projects (currencies), that is, people invest money in a project (mostly on-chain meme) and hope that it will soar in a very short time. Speculation is not actually a derogatory term in this field, and any financial market actually has certain speculative opportunities and speculative behaviors. Trading is more about the execution of specific strategies and the understanding of timing and market trends. Investment is a long-term belief in the fundamentals of the project.
So, if you just like gambling, then I guess you won’t listen to anything I say now, because you are the one who loses money in the end, not me. But if you don’t think you are gambling, then it’s best to set and execute profit and loss targets strictly.
2. Risk management of positions
Another misunderstanding of many people is that once they are optimistic about a currency, they will fall into two possible states:
One is to buy more as the price rises. That is, when the price starts to rise, they will continue to buy more because they believe that the price of their position will continue to rise.
The second is to buy more as the price drops. That is, when the price starts to fall, they will continue to buy in an attempt to lower their average cost.
But the above two approaches are actually increasing your trading risks.
Regarding the issue of buying more as the price rises, my suggestion is that you can strictly follow the profit-taking and stop-loss target strategies mentioned above. If you are really optimistic about the long-term development of this project, you might as well set the profit-taking and stop-loss target ranges a little larger (within your acceptable range), and then extend the transaction execution cycle. In plain words, you can hold it for a longer period of time. Don't think that you have held the currency for a long time after buying it for less than two weeks. Reasonably define the difference between your own long-term, medium-term, and short-term.
If you have already taken all profits (for example, one-time profit taking, or N times in batches), then don't chase high prices casually. If your position is really a good project worthy of long-term attention, then there is no need to rush at this moment. There will be plenty of time later in the market (especially during a bear market) for you to buy on dips and accumulate opportunities.
Regarding the issue of buying more as the price drops, in addition to strict profit-taking and stop-loss target setting, if you are really optimistic about your position, then I only suggest that you rationally add to the purchase, such as combining the Fibonacci retracement indicator to buy several times at low prices at fixed positions such as 38.2%, 50%, and 61.8%.
In short, buying/selling in batches is correct, but buying in batches does not mean buying more when the price goes up or more when the price goes down. You need to take possible risks into consideration. The core idea of position risk management should be to take a greater risk at the beginning of the transaction and reduce the risk during the transaction.
3. Balance of positions
Let's continue with the assumption that you traded two tokens, A and B, and invested $1,000 in each. A few months later, the value of token A rose to $5,000, while token B fell to $10. What would you do in this situation?
There are several possible approaches:
One is to continue to wait and see and not take any action.
The second is to keep the A token unchanged and then continue to buy the B token to lower the average price of B, hoping that B can pay for itself later.
The third option is to sell A and B all at once, which would yield a direct profit of about $3,000.
Fourth, balance your own risks, that is, you can directly sell part of the tokens that have risen, so that the corresponding income can make up for the loss of another token. The advantage of doing this is that the currency that has risen 5 times itself is already facing a certain risk of callback. It is reasonable to take part of the profits at this time, and you can also balance the loss of another currency. At the same time, you still hold a certain amount of currency A, and you should have no psychological pressure to hold it next.
The above is just a simple assumption. Similarly, the balance of positions also needs to consider your own capital size and investment portfolio. For example, the analysis and considerations for investing in two tokens A-B are different from those for investing in five tokens A-E.
In the stock market, there is a term called R, which refers to the rise and fall of the stock market. We can also apply this R to the crypto market to refer to the rise and fall of tokens. Let's continue to make an assumption. Suppose you directly invest $10,000 to buy a token, and you hope to make $10,000, then the risk you take on this transaction is 1 R.
But suppose you buy a token with $1,000 and hope to make $5,000, then you are risking $1,000 to make a 4 R transaction. Obviously, if you only look at the risk balance, the risk of this 4 R transaction will be lower.
Although the 1R above seems to make more money, you also have to bear the risk of losing $10,000. Of course, this may also be related to your position. If most of your positions are just BTC/Ether, then in the long run, no matter how many Rs you buy, I think it is a low-risk transaction.
Investing is not gambling. Although some people like to say "heavy investment can make miracles happen", the premise of this miracle is that are you really prepared to lose all your money?
4. Diversification of portfolio
We have mentioned above that the analysis and considerations for investing in two tokens A-B are different from those for investing in five tokens A-E.
In terms of investment strategy, it is beneficial to have a larger portfolio and make necessary diversification. But everything needs to be done in moderation. I found that many new partners like to buy more than a dozen or even dozens of currencies, which is obviously a bit too much. Don't fish with a scatterbrain mentality unless you have long-term capital conditions and global vision like The Vanguard Group (the company's basic approach is to buy everything it can buy).
During the entire bear market in 2022-2023, our advice to everyone has always been to give at least 50% of your positions to BTC/Ether (for fixed investment), and then 40% of your positions can be used to buy potential projects (Altcoin) in the track you are most optimistic about, while keeping 10% of your positions unchanged (to deal with possible black swan events). As for the number of Altcoin held, it is recommended that it is best to control it within 5.
But everyone's situation is different, and the amount of funds is different. As for the issue of diversification, different people may have different views. Moreover, at different market stages, the considerations for diversification are also different. At this stage, if you are just entering this field, then my advice is:
You can keep 30% of your position to build a position (i.e. buy in batches) in BTC and Ethereum, 20% of your position to buy the blue-chip projects (Altcoin) in the track you are most optimistic about, and the remaining 50% of your position is cash (BTC and Ethereum). If you like adventure and are prepared for possible losses, you can invest in projects with medium and low market capitalization (DYOR, you need to consider the narrative and current market conditions to choose projects).
Of course, the above is just a reference suggestion. After all, your wallet is your own and you need to be responsible for all your investment behaviors.
5. Use of trend indicators
In addition to the trading strategies and disciplines we mentioned above, if you want to make more reasonable trading operations, it is also necessary to make good use of some trend indicators, rather than trading "based on your own feelings", "based on what others say", or "based on the news you see".
There are currently many on-chain indicators in the crypto field that can be used for reference. Taking BTC as an example, there are at least a dozen commonly used indicators, as shown in the figure below.
In addition to some common on-chain indicators, there are also many technical indicators in the K-line, as shown in the figure below.
At the same time, different indicators may be applicable to different period ranges. For example, some indicators are more suitable for long-term transactions (such as AHR999, MVRV, Rainbow Price Chart, etc.), some indicators may be more suitable for medium-term transactions (such as EMA200, Fibonacci, VPVR, etc.), and some indicators may be more suitable for short-term transactions (such as EMA9, MACD, etc.).
But in fact, we don't need to master all the indicators. We just need to pick the most suitable indicators to pay attention to. Which indicators you choose depends largely on your own investment portfolio and trading style. In addition, the core purpose of the corresponding indicators is to provide necessary assistance to your decision-making, so that you can better increase your position or partially close your position. Indicators do not represent everything, but all your operations can be based on some specific indicators for necessary assistance.
As for some specific indicators, the e-book of Huali Huawai also sorts out some commonly used ones. Interested friends can download the e-book to learn more. Or if you are interested in any indicator, you can also learn about it through Google. Due to limited space, we will not go into too much detail here.
This is the end of our sharing of this issue. This is also the 474th article updated by Hualihuawai. For the data references and image sources involved in the main content, please refer to the corresponding date articles of Hualihuawai Notion version.
Disclaimer: The above content is only a personal point of view and analysis, and is only used for learning records and communication, and does not constitute any investment advice. The encryption field is a high-risk market. In addition to various forms of fraud and pig-killing schemes, many projects also have the risk of returning to zero at any time. Please look at it rationally, improve risk awareness, and do not touch it if you don’t understand it!
