How To Trade Well

How To Trade Well

By mduchow | EW Price analysis | 5 Apr 2020


“When a beginner wins he feels brilliant and invincible, then he takes a wild risk and loses everything.” - Alexander Elder

It’s not possible to become a successful trader overnight. The markets are designed so that most traders will lose money. The markets need a fresh supply of losers like the constructors of the pyramids in Giza needed slaves. Losers bring money to the markets, which is necessary for winners to prosper. 

Day trading can provide an excellent alternative to traditional employment for many reasons. Only some of the perks are financial freedom, professional independence, plus the ability to live your life on your terms. But trading is fundamentally a competition and some attributes, in order to be successful, are non-negotiable - a proper understanding of who you are competing against as well as the environment that you are trading in is necessary. But arguably the most important thing to understand when beginning to trade is psychology


THE COMPETITION:

Many beginners are unaware of how Wall Street got its name, although this is cryptocurrency the psychological lesson still applies for all financial markets. Wall Street is named after a wall that prevented the animals from escaping a farm in northern Manhattan. The institutions on Wall Street today act as the same wall, with the elite belonging to what seems like an exclusive club. To them, we are the animals - no better than paper. But with proper understanding and practice, you'll find that that club isn't too difficult to join - or beat.

In trading you will encounter 4 classes of traders designated by their psychology: Bulls, Bears, Sheep, and Hogs. The Bulls are buyers, The Bears are sellers, The Sheep can take on the disguise of a Bull or a Bear listening to “trading gurus” but whimper when the market gets volatile, and The Hogs get slaughtered. When the market is trending, the Bulls & Bears are selling or buying, while the Hogs & Sheep get run over. 

When you are a beginner, it will seem like a natural instinct to listen to traders with more experience for tips on how to position yourself. However, I cannot emphasize enough the importance of solitude and isolation when developing yourself. A Hog will get greedy and trade their actual working capital before honing their skills and a Sheep will make a lucky gain listening to “gurus” only to run their account into the ground not knowing what to do afterwards. Paper trade and practice to discover what you are good at before risking your capital in your trading account.

The trend is your friend. Become a Bear & sell/short when the market is in a down trend and become a Bull & buy/long when the market is in an uptrend. Take profits when you get them or someone else will, a Hog will hold onto a position to gain more profit even after a trend has reversed.


MARKET STRUCTURE:

It is possible for the market to move in 3 directions: Up, Down, and Sideways. An uptrend will form when buyers will place bets that the market will rise while sellers wait for a higher price in order to sell. A downtrend will form when sellers will place bets that the market will fall while buyers wait for a lower price to buy. The market will trend sideways when both sides are indecisive and are waiting for the other side to create a new trend or continue the current one.

One of the most common things you will hear as an area of interest when a market is trending in a particular direction is supports & resistancesSupports & resistances are areas where the market won’t break in a particular direction and are a direct result of the markets psychology

When the market is trending sideways but breaks upwards then this area becomes a support. This happens because the Bulls regret not buying and assure themselves that they will buy if the market returns to that particular level. The Bears regret selling and need to close their short positions/buy in if the market has a pullback. Supports become the best level for Bulls to buy and the best level for Bears to close shorts - this is why the market returns to/retests areas of support or resistance 99% of the time. 

When the market is trending sideways but breaks downwards, then this area becomes a resistance. This happens because the Bulls need to close their buy position on a pullback and the Bears regret not selling and assure themselves that they will short if the market returns to that particular area. Supports & resistances form because Bulls and Bears are always trying to buy/sell/long/short at the best level possible.

Traders are forced to make split second decisions around the clock otherwise someone else will take their position - this applies when taking profit or opening a new position. The pressure of having to make such fast decisions often results in FOMO. A trend reverses when a trader takes a position in an opposing direction and which sparks the rest of the market to follow. An uptrend reverses when a trader sells earlier than another trader wanted to which sparks selling. A downtrend reverses when a trader buys earlier than another trader wanted to which sparks buying. The only way to avoid getting caught in reversals is isolation and taking profit early. 

A trend reversal is one of the most important things to be able to recognize. A probable trend reversal is identified using several methods, but the most reliable indicator is volume - falling volume means a weaker trend therefore a reversal is likely and climax volume is when sellers dump or buyers pump, stopping a trend dead in its tracks. But a buyer should not try to catch a falling knife and a seller should not sell a projectile barrelling upwards. Therefore it is incredibly important to analyze how strong the trend is prior to taking a position. The stronger the trend, the slower the market is at reversing. It is easier to get up after falling down a flight of stairs than it is after falling out of a 10th story window - the same goes for an uptrend reversal. 


TRADING:

Bar none, the title of this post is very intentional, it’s titled how to trade well not often. It is your job to take confident positions when your reward outweighs the risk. Leave the responsibility of having to trade every move to the institutions who do not have the benefit of not trading. Private investors like yourself have the luxury of waiting until the perfect trade. However, it’s undeniable that the cryptocurrency markets in particular are significantly more volatile when compared to traditional financial markets - when these markets get moving, they REALLY get moving. There will be many situations where the market begins to move and you miss your entry point. In situations like this, I’d strongly recommend sitting out and waiting for another opportunity to come along with the mind set that it is not your trade, simply get the next one. But if you are not someone who can resist the urge to trade, then split your account in two between a trading account and a HODLing account. But keep in mind that, for the most part, investors who simply HODL have not been profitable since pre-2017, as the majority of the time spent since then has been in a downtrend. 

But there are some general tips that can help you become a successful trader:

 

Don’t allow commissions (fees depending on the exchange) eat profits/Manage slippage:

 

Depending on the exchange that you use, fees will vary. If you are a spot trader and simply trade using the funds within your account, then the fees that you will likely encounter are simply just exchange fees like buying and selling. This kind of fee normally trades place on centralized exchanges like Coinbase where you are trading (purchasing/selling) with the exchange. This is where the exchange has a centralized supply of coins/USD in order to facilitate buying and selling. Binance uses this structure as well even though it provides a marketplace for peer to peer trading. Generally, centralized exchanges like Coinbase are harmful to the distributed networks, but that’s besides the point. 

But before you notice fees will catch up to you and you can waste all of your profits paying for fees if you make too many bad trades that you had to close prematurely. Therefore rushing into opening/closing positions can get extremely expensive over time. Slippage is the price difference between the market value and the price your position gets filled at. Slippage becomes more significant when the market is more volatile. So when you FOMO into longing large green candles or shorting red candles, you'll end up getting hit with extreme slippage which can even ruin your entire trade in cases where the market is extremely volatile. Don't trade on large moves, get in before the move starts or after it ends. 

But the vast majority of traders in crypto or generally any financial market, institutional and private investors alike, trade with leverage on margin where you will encounter brokers fees to pay a broker that’s employed by the exchange who fills your positions. Margin exchanges are in tandem with the next rule:

 

Manage your position size appropriately:

 

Margin exchanges are where you can leverage coins using a deposited margin. It is important to consider your amount of leverage based on your margin size. That rule becomes significantly more important for cryptocurrencies in particular because some exchanges allow you to use a substantial amount of leverage, with most allowing as high as 100x and some even as high as 500x. Although it might be tempting to leverage as much as possible, it is generally recommended to never trade over 10x and to never margin trade with an account smaller than $2,000, in order to appropriately protect your capital. However, I personally make an exception for this rule and will trade using 100x on PrimeXBT on days where the market is extremely volatile and I’m confident that a substantial move in price is coming. I use this exchange because, in my opinion, they are by far the safest high leverage exchange to protect your account. Some of their features are:

  • An offline wallet as well as a trading wallet
  • A relatively light fee structure
  • You can use your entire account as the margin for your position - drastically lowering your chances of liquidation and some of the other exchanges that I’ve tried close your position after the price moves a specified amount regardless of your margin size
  • Your funds are highly secure - only allowing withdrawals once/day and every withdrawal is processed by hand & not automated
  • Trade discounts after your turn over reaches a certain amount:

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However, it’s still incredibly important to choose your position size appropriately based on the size of your account - never allow your available margin to fall below 50%. Assuming you responsibly trade, margin trading is by far the most profitable method of trading, while it’s more important than ever to protect your capital since you are trading using someone else’s money rather than just your own. 

 

Keep your emotions at home:

 

Don’t allow your emotions to dictate how you trade. If you feel FOMO, don’t trade. If you went on a losing streak, don’t revenge trade to “make your money back”, you will only lose more. If you are on a winning streak and your trades grow bolder with your confidence, don’t trade, it will only result in you overtrading and giving back everything that you had made. If something happened outside of trading like you’ve had a bad day, don’t trade. No matter what if there are any external factors influencing your mood or your psychology, do not trade. Emotions that are strong enough to impact your mood,  will only impact your trades negatively. 

 

You will only succeed when you think for yourself:

 

Sheep and Hogs both get run over for a reason. You will never learn how to properly trade and find successful positions on your own by following someone else’s trades. Trading properly is incredibly personal and highly dependent on your personal risk tolerance as well as your comfort level. That does not mean that you should disregard other trader’s opinions, any alternatives should be considered as well as ideas that affirm your own, but they should not dictate how you trade. 

 

Never change your plan after entering a position:

 

In the classic Greek story, the Odyssey, Odysseus asks his crew to tie him to the mast of his ship to prevent him from jumping overboard tempted by singing Sirens. The Sirens tune is beautiful and has the illusion of harmony. No matter how tempting or how “promising” changing your position appears, tie yourself to the mast of your position. If it sinks, go down with your ship.  You chose your position for a reason therefore you should be confident in it. If you lose confidence, then you shouldn’t have taken the position to begin with and it was not a good trade. This is why choosing your position wisely is arguably the most important rule in trading. NEVER TAKE A TRADE THAT YOU ARE NOT CERTAIN ABOUT.

Before entering any trade, you should determine the areas where you would like to take profit as well as the areas where you would need to cut your loss. In general it is recommended to never risk over 2%-5% of your account value. If you closed your position, do not enter a new trade unless you have a new confident plan. 

Plan each and every trade using software like Tradingview or Trendspider. Keep a ledger where you can write down every one of your trades as well as the reasoning behind taking it. This can help you learn faster and can help identify patterns if you have seen a pattern before. 

 

Pick your strategy:

 

Find a trading strategy that you feel confident with and that you have developed personally. No method of trading is right or wrong, if it works for you then great. There are two types of indicators: 

Leading - RSI, MACD, Oscillators, Stochastics, Moving Averages

Lagging - Patterns

Traders will use leading indicators to help determine potential future moves. This can be determined on several different timeframes, although if you are trading it’s never recommended to use something less than a 1 hour timeframe, you can use indicators on smaller time frames like the 15 minute chart only to affirm/track an indicator found on a higher time frame. Stronger indicators are found on larger time frames. This is because larger traders with the power to move the market don’t trade on 15 minute or even 1 hour timeframes, they trade once every few days using the daily chart or even once every few weeks using the weekly chart. This is because they trade well not often. Therefore larger position sizes should be taken on larger time frames because the longer the trend then the stronger the move because an indicator on a 4 hour or a daily chart will take a 4 hour or a daily timeframe to play out, while an indicator on a 15 minute chart will play out on a 15 minute timeframe so lower timeframe trends will play out significantly faster. If you  are scalp trading on smaller time frames, then your position size should be much smaller.

Lagging indicators are confirmations of moves in progress. Something like candlestick patterns are lagging indicators. Traders that use lagging indicators will often use leading indicators to affirm the pattern that they are trading. 

The classification of the indicators is incredibly appropriate and both have their own shortcomings. Generally, if you trade using lagging indicators then you will likely miss out on the beginning of the move and are late to the party. Therefore, by the time you enter a trade, traders who use leading indicators have already made the trade, some are even getting out when you are getting in, so your trades may be short lived when compared to traders using leading indicators. However, this is a much safer way to trade as you are waiting for confirmation of the trade before actually making it. 

While traders who use leading indicators have the advantage of potentially finding a move before it happens and making more profit, there are still shortcomings and it is slightly riskier without having the confirmation that pattern traders do. You run the risk of misidentifying a trade, potentially resulting in  the market moving the opposite direction as well as the risk of exiting a trade too early if the trade gets extended. 

Personally I use Elliottwave. Elliottwave is the theory that the market moves in waves and is a leading indicator. These waves are market cycles and are comprised of two kinds of cycles:

Impulsive - trending

Corrective - pulling back

Impulsive structures are forming the trend. The structure is composed of 5 subwaves that are impulsive, meaning they move with intent/purpose and are very strong for the most part. The first, third, and fifth subwaves are impulses while waves two and four are corrections. The third wave will be the longest and strongest while the first and fifth are usually proportionate in size, with the exception of an extended 5th wave in rare cases. The “strength” of each wave is determined by their length in relation to wave one, measured using fibonacci retracement/extensions. The first wave will never go beyond the 1:1 fib extension or 100%, the second wave can retrace as much as 90% or the 0.9 fib level but generally will retrace 61.8% (0.618) - 78.6% (0.786), the third wave will measure no shorter than 161% (1.618) and up to 200% (2.0), the fourth wave can never reach into wave 1 territory so if the first wave measures 100% and the third wave measures 161% then the fourth wave cannot exceed the 61.8%(0.618) measurement, and the fifth will generally be the same length as wave one but can extend to the 261%(2.618) measurement. 

Corrective structures are counter trend. The structure is composed of 3 subwaves and will never retrace more than 100% of the previous impulsive structure. Corrections can be flats (ABCs) or complex WXYs or WXYXZs. ABC structures can have the shape of 5-3-5 or 3-3-5 waves.

5-3-5: Flat

A: 5 subwaves(impulse)

B:  3 subwaves (correction)

C: 5 subwaves (impulse)

3-3-5: Expanded Flat

A: 3 subwaves(correction)

B: 3 Subwaves(correction)

C: 5 subwaves(impulse)

WXYs are 3-3-3 and WXYXZs are 3-3-3-3-3. 

 

News is secondary:

 

News is for investors, not traders. If you are HODLing or investing long term, then news will certainly have an impact on your investment, but traders work on too small of a time frame to be strongly impacted, with the exception of incredibly significant events that change everything very rapidly. But for the most part, don’t allow news stories to influence how you trade, the only thing that matters is price action.

As an example, I was able to find the top at the end of February when the news would have had you thinking everything was bullish, and was able to short above $10,000. For traders, bearish price action and the end of the trend was clear weeks in advance, long before there was any news revealed that things were bearish.

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Leading Indicator clear as early Feb 21st

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Lagging indicator confirmation on March 5th

Don't get greedy:

 

The last rule is simple. Don't get greedy. Take profit when you get it, or someone else will.


These are some of the tips that I wish I would have known when I began trading. Trading isn’t easy and I had to learn them the (very) hard way and repeatedly ran my account into the dirt along the way. It took me at least a year before I finally became profitable, but it’s grown into a significant source of my income and I can consistently make $1000+ a day doing so. This also is not sacrament, there’s an infinite amount of strategies out there as well but I hope it can help if anybody is thinking about taking the step into trading.  

https://primexbt.com?signup=93169

https://www.tradingview.com/u/mduchow/

 


mduchow
mduchow

21 y/o Economics major at the University of Northwestern, Chicago; Elliotician; Crypto Enthusiast; Blockchain advocate; Suspect of all things centralized


EW Price analysis
EW Price analysis

Price analysis from my perspective using Eliottwave

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