Navigating Crypto: Crafting a Successful Trading Philosophy

Crypto Trading Philosophy

In the constantly changing cryptocurrency environment, developing a strong trading philosophy is vital for successfully navigating the volatile waters of this market. A trading philosophy is not solely concerned with strategies or tools; rather, it involves a thorough approach that encompasses mindset, risk management, and in-depth comprehension of the intricacies of the market dynamics.

Investors vs Traders

Are you a trader or investor? Understanding different investment methods can help you make informed decisions that match your financial goals, risk tolerance, and current investment portfolio. Predominantly, there are two primary investment styles: investing and trading.

To encapsulate it succinctly, investors scrutinize value while traders assess price. In the case of equities, the intrinsic value is propelled by underlying fundamentals such as cash flows, growth, and risk. Price, on the other hand, is dictated by the dynamics of supply and demand. The trading realm encompasses various principles, strategies, and philosophies.

Traders

A widespread misconception exists that merely buying tokens makes one an investor. However, if one's decisions are predominantly influenced by price, market sentiment, and momentum, one would be more accurately categorized as a trader. It is important to remember that investors use fundamental analysis to find the true value of an investment.

Fundamental analysis involves estimating a security's intrinsic value by closely scrutinizing internal and external factors.

Trading follows a set of guiding principles, such as:

• The notion is that fundamental analysis (typically utilized by investors) is ineffective in explaining price variability, particularly within the volatile realm of cryptocurrencies.
• The belief that the market factors everything implies that price fully reflects all obtainable information.
• The observation is that investor behavior usually follows predictable patterns, with many market participants making decisions steered by emotional reactions.
• The understanding that market sentiment dictates whether the price is above or below the intrinsic value. A sense of optimism can propel prices above their actual value, while pessimism can depress them below it.
• The strategy of traders to decode the prevailing market sentiment, with their focus firmly placed on price action rather than intrinsic value.

Rookie traders often make the mistake of trying to predict future market movements. On the other hand, experienced professionals avoid making predictions. Instead, they look at how strong buyers and sellers are, watch for trends, and carefully handle their positions. Additionally, many traders utilize technical analysis, interpreting price and volume charts to gain a competitive edge. They also rely on price charts that present past primary market data, identifying patterns with arrows and straight lines that emphasize the trend. This offers a streamlined view of the detected trend and potential future price movements, whether they are expected to be within or stray from the trend.

To summarize, traders:

• Examine charts to discover patterns,
• Apply indicators to discern trends,
• Use relative strength to identify potential outperformers and
• Study cycles to pinpoint potential turning points beforehand.

Emotion Management

Prior emotional decisions inevitably influence emotional decisions. This psychological interplay forms the basis for technical analysis concepts such as support and resistance and numerous behavioral finance concepts like loss aversion. Investors generally exhibit consistent behavior over time and do not radically alter their investment patterns. This leads to noticeable market patterns that are expected to happen again in similar situations in the future because investors tend to do the same things they did in the past.

Let’s now define these terms more precisely.

Behavioral finance, a part of behavioral economics, suggests that psychological factors and biases can greatly impact how investors and financial experts make financial decisions. These influences and biases can potentially explain various market anomalies.

Behavioral economics explores the impact of psychology on the economic decision-making processes of individuals and institutions.

Loss aversion is a principle in behavioral finance that suggests investors, out of an overwhelming fear of losses, focus more on avoiding losses than on making gains. Frequent encounters with losses can heighten an individual's susceptibility to loss aversion.

Great traders are experts in these fields and use them in their game.

Art of Trading

In tumultuous markets like cryptocurrency, the inefficiencies, mispricing, and misperceptions caused by other investors’ emotions offer opportunities for superior performance. Traders need to be on the beneficial side of these errors to turn tactical trends into profits.

Here is a checklist to spot these opportunities:

• Are you overlooking any hidden risks?
• Why is someone keen on selling it to you?
• Do you possess more knowledge about the asset than the seller?
• Why was not the asset purchased by someone else before you?

However, spotting these market inefficiencies is tricky, as every player seeks profits. If a deal is to be made, it must serve a clear purpose. It is crucial to consider who is on the other side of your transaction, buying or selling:

• Who might suffer from long-term underperformance, and why would other investors choose a losing position?
• Why don't smart investors take advantage of this apparent opportunity?

How to Trade?

Predicting short-term occurrences such as crypto narratives is a tough call for most non-professional investors. Therefore, they should be cautious about overly relying on their own or others' opinions.

Some prevalent trading strategies include:

• Scalping – A short-term, high-frequency trading strategy to profit from minimal price movements. Scalpers execute multiple trades with modest profit targets within a brief time frame, often just minutes or seconds.

• Day Trading – A short-term strategy entails buying and selling financial instruments within a single trading day. Day trading primarily aims to benefit from minor price fluctuations throughout the day. This strategy requires continuous market monitoring, rapid decision-making, and a disciplined approach to risk management.

• Swing Trading – A medium-term strategy that aims to capture gains from market trends spanning several days or weeks. Swing traders analyze price patterns and trends, utilizing technical and fundamental analysis to pinpoint potential trading opportunities. Their goal is to profit from price swings between the trend's highs and lows.

So, how do we achieve short-term superiority versus other traders? To outsmart the market, you should possess:

• Insight - Think differently from other investors, spot things they overlook, or bring unique perspectives they lack. Additionally, search for deviations from existing trends.
• Different reactions and behavior – Knowledge alone does not suffice. It would help if you acted differently to outperform the market.
• Luck – Markets are unpredictable, making it impossible to anticipate everything.

While no trading philosophy guarantees profits, establishing a strong framework can significantly enhance the probability of success in the dynamic world of cryptocurrency.

What Next?

You can find more in my upcoming book “CRYPTOCURRENCY INVESTING: The Fundamental Analysis Guide: How To Become A Successful Cryptocurrency Investor Using Fundamental Analysis.”

This is the book I wish I had read when I started my journey.

Follow me on Twitter to get a sneak peek of what is coming!