My fundamentalist views on investment has left me floundering in cryptocurrency. Because, while it is possible to look at “fundamentals” in cryptocurrency — the development team, the project plan, the underlying technology and algorithms — a lot of it is still on paper and involves heavy speculation.
Just because the technology sounds good and solid does not mean that it will take off and fly with mass adoption. History is filled with examples of great inventions boasting technically superior features but were flops. You’ve all heard of Apple’s iPhone and iPad but you probably didn’t know that Apple already created a handheld device called the Newton as early as 1993, and it flopped, which is why you probably don’t know about it.
Aside from that, the cryptocurrency market is so volatile and subject to wild swings. A lot of people who knew next to nothing about bitcoin jumped into it as “investors” last year when the market swung wildly upwards, from around $900 in January to $19,000 in December. And then it began to drop, and drop, and drop to around $6,500 as of this writing.
So I decided to give technical analysis a shot and to study it seriously.
The first thing I learned was that while it seems what technicians do is study charts and graphs, those who understand what they’re doing are really studying human behavior. There is a cycle of hope, greed, fear, and regret that you must understand. The value of studying charts is not because they contain some magical patterns to unlock untold riches, but they tell a story of buying and selling habits. Understanding that can help you predict what is most likely to happen next.
The second thing I learned is to always trade with a plan, and to stick with that plan. What usually happens to people who do not have a plan is they buy when they feel like it, and then try to improvise along the way. Doing that makes you subject to varying emotions which will greatly affect your decisions. If the price swings high, you might be reluctant to sell and take profits, hoping that it will go even higher. If the price goes down, you might be tempted to buy more because “hey, it’s a sale!”
Trading with a plan means assessing your risk-to-reward ratio and determining if a trade is worth it even before entering it. And if you do enter it, then you have to put in certain safeguards in the trade so that if things do not go as expected, you can keep your losses to a minimum and live to trade another day.
Of course, you need discipline to execute your trade as planned. It does no good to create a plan, and then during the trade, you start moving your safeguards because of greed or fear or any other emotion.
The third thing I learned is to be happy with small wins. You can wait for that rare 200% jackpot trade. Or you can start making smaller but more trades at which you only earn 10% each. If you make twelve 10% trades, that will give you a compounded return of 214%, and it won’t be as difficult or nerve-wracking.
Email me at andy@freethinking.me. View previous articles at www.freethinking.me.