image courtesy Austin Distel-Unsplash

Author's note:  People new to trading enter the crypto-market constantly, and the amount of information they must digest to make sound and informed decisions can be overwhelming. 

Here is the fifth in a series of articles based upon my own experiences and study to help the inexperienced and under-educated get off to a good start trading/investing in crypto-currencies. 

Disclaimer: Nothing I write in any of these articles is financial advice of any type. Be sure to do your own research and thoroughly understand the assets you're investing in and how various trading mechanisms operate before deploying any capital.

Every Battle Is Won Or Lost Before It Is Ever Fought

One fact of life in the crypto-market (or any market) that may elude someone new to trading is this: the participants are engaged in the business of working to take capital from one another. Trading is a competition to see how much OPM (other people's money) one can collect. Exchange platforms facilitate these wealth transfers, which provides insulation between the participants and de-personalizes trading activity. The fact remains: trading the crypto-market is war and nothing else. I think of trading as "martial arts for the mind." Until now, in this series, the focus has been on the more philosophical aspects of crypto-trading. It's time we addressed some of the more practical, nuts & bolts features of trading.  

Many factors blend together to determine the level of success any person will enjoy as they utilize their skills and knowledge to develop the edge they need to trade profitably. For people new to trading who are working on their skills through study and practice, preparing with a higher intensity level than the next guy is a critical step forward in the process of separating oneself from The Herd. Often, that amount of preparation can be fundamental while still having a distinct impact on your bottom line. 

Utilizing a written trade plan for every position one opens is one of those essential steps that can increase one's chances for both short and long-term success. I had no experience trading when I started in 2017. As I began to grow in my trading, I quickly discovered that one of the best things I could do to help give myself an edge was to create a written trading plan every time I considered opening a position.

Put It In Writing

Here, we'll spend some time looking at some of the benefits of creating a written plan. 

By taking the time to think through various aspects of the trade step-by-step, one can help avoid FOMO and the tendency to chase green candles. When a given crypto's price is heading north in a significant fashion, and others are talking about their double-digit profits, the temptation to jump on the gravy train can be considerable. At this point, though, it's quite likely the train has already left the station, and you will be better off waiting for either a retrace or a flagging of the price action before getting onboard. Slowing the process of opening a position down by writing out the particulars allows one to think clearly about what you're doing. This pause in the process presents one with the opportunity to thoroughly look at the price action and other indicators to see if opening a given position makes sense. It also provides time to look at the risk management side of things and make sure your planning there is sound.

Make It Part Of The Record

Once you've put in the work on a plan, you will be much less likely to change your mind if/when the market changes and unfavorable conditions appear. You will already have considered the crucial "if this happens, then I will do that" aspect of trading and understand how you will respond to evolving market conditions. Writing out one's thoughts in a plan format makes it much less likely that you will react emotionally as the trade moves forward. Many people have heard and give lip-service to the notion of removing emotions from trading. Creating a written trade plan is a big step forward in that process. It also helps you avoid planning for a trade and then not taking it when the signal to open a position is present. For some traders, this can be an issue at times. Once you've invested the time and energy in creating a written plan if you see the signal you've been watching for, pulling the trigger is much easier.   

Evaluating one's overall trading system is another good reason for using written trade plans. Once a trader has a number of trades large enough to constitute a representative sample, an evaluation process on a regular, on-going basis is a sound practice. One should make it a habit to examine their overall trade execution for any sign of flaws; having written plans are essential to that process. With the facts in writing right before your nose, it's less likely you'll overlook areas that need improvement.     

One of the reasons crypto-trading is so attractive to people is the freedom it brings to be self-employed and make the rules by which your business operates. (If you don't think trading is a business, please read part 2 of this series). What items one includes in their trade plans is solely up to the individual trader, but here are some basics with which a novice should begin.     

First Things First     

At the beginning of any trade development process, the first question is: will this be a short or long position? If you're a Bear seeking to make profits as the price moves down or a Bull who's thinking the trend is moving upward, determining "short" or "long" has to be your starting point. Most people new to trading only open long positions but with the opportunity to earn profits while the market moves south; at some point, the student owes it to themselves to learn the basics of selling short.

One should spend time considering what the reason is that you're looking at opening the position. What pattern or combination of indicators tell you this is a good time to open a position on a given asset? Write these ideas out so that you can review and edit as needed. Ideally, you're seeking a confluence of the price action with one or more indicators (MACD, RSI) pointing to a probable direction for the price to move. Waiting to see such signals is what separates trading from gambling. Much to the disappointment of many, Technical Analysis is not a crystal ball and cannot foretell the future. By providing graphic reference points in the price action, T/A can provide one reason to think that, more likely than not, the price may move in a given direction. By creating this edge, the trader can consistently experience success over the long haul in the same manner that a casino does.

A trader should carefully consider entry/exit points and a stop loss level before opening the position and write them down. A trader is a person who pays careful attention to each of these aspects of trade execution, a member of The Herd does not. Where one should open the position is again a matter of finding the combination of patterns & indicators that show the price will move in a favorable direction. Planning for exiting a trade is as important as planning for opening it and reflects your overall strategy. For example: once the position is profitable, will you take profits all at once or in stages? Price targets should be established from lines of resistance and written out. Speaking of exiting a trade, using a stop-loss order is an essential technique overlooked by many newcomers. Just as every trade needs a written plan, each trade also requires a stop-loss to minimize risk. T/A does not provide a crystal ball, and you will inevitably open positions that go south. Knowing when to cut losses is an essential part of every trader's education and understanding how to place a stop-loss correctly is a vital part of that process.   

A further aspect of a trading plan that one should not overlook: alarms. One can use alarms to notify you when the price action has moved into more favorable territory. Trading platforms such as TradingView and Coinigy allow users to be alerted when conditions are right to open a position. Setting the alarm is easy and, since most people are too busy to be in front of their computer 24/7, this can save you missing out on your entry point and all the disappointments that accompany that.

Another critical item is tracking the fees paid to the crypto-exchange one is using. Because these fees can be considerable, recording them and factoring them into one's profit/loss cannot be ignored by anyone operating their crypto-trading operation.

Choose A Style That Looks Good On You

I am deliberately not including a sample trading plan in this article for several reasons. This omission is because I think it's more useful for the reader to create their own, customizing the plan to their needs and the info that each individual finds vital for their purposes. I am a proponent of a "hands-on/DIY" approach to either teaching or learning. The thought involved in the development process will be beneficial, especially to the novice who is still sorting things out. Some traders prefer a spreadsheet-style format; others like myself use a journal-style format. The reason for that is that I track certain information that doesn't fit well on a spreadsheet, such as my "mental/emotional" state. For my purposes, making a note of what I was thinking/feeling at the time of the trade is essential; another trader might disagree and not record it. Tinkering with what information one includes and how one records it is a normal part of evolving as a trader.

These are the basics of creating a trading plan that I have found to be useful and productive. As you grow and progress in trading, your needs will change with the increased understanding that study and practice are providing you. The trading plans you create in the future should reflect this growth on your part and will evolve from the very basics presented here to a more fine-tuned version that matches the increased skill and knowledge you will be utilizing. While a poorly written or thought out trading plan may be better than none at all, the amount of work that goes into creating a solid plan is minimal; one should not ignore that process.

As I continue producing these articles, I hope you will come back for more.  Up next: Part 6: The Case For Learning Technical Analysis