How hard is it to start trading cryptocurrencies? Is it even possible to do it without any relevant background? How do I start? What should I know before I begin? You’ll find answers to these and more questions below.
Beginnings of trading are always hard, especially if you’re completely new to the scene. The following article is a compilation of frequently asked questions by beginners.
And who better to answer than a successful crypto-trader who also started like you? He will be referred to here as Bad Ape (you can follow him on Twitter here).
Bad Ape hails from the Nordics, currently lives in Bali, and supports himself by trading. His background has little to do with finance or economics, so he had to learn everything on his own. Therefore, he knows what challenges lie in front of beginner traders. For safety’s sake, he asked for his name to be kept anonymous. He also recently released Coindraft (in Beta), which combines realtime blockchain analysis with financial models to give crypto assets investors an information edge.
Let’s get going!
1. Do I need any special background to become a trader?
Some practical experience with financial markets or finance will give you a head start. And it doesn’t have to be directly in trading.
Before you start, you should make yourself familiar with the mechanics of traditional markets, how markets move, game theory, and what kind of forces influence them.
Be aware that succeeding with day trading is very difficult, and most people who do it are gamblers without a game plan.
2. Is there a minimal amount that I need to trade?
Everyone has a different appetite for risk. Cryptocurrency trading is dominated by people who have a big appetite for risk.
Stocks are safer in many ways. They are less volatile (although lately it seems like it’s the cryptos which are stable). Additionally, if you trade cryptos you may lose your money by sending it to the wrong address, and the overall infrastructure is still pretty poor. On the other hand, the barriers of entry to traditional markets (in terms of minimal investment) are quite high. Minimal investments are high, and you usually have to be an accredited investor to qualify for certain things.
However, cryptocurrencies allow you can easily and quickly access the market and jump in with very little money (let’s say, $10). You can build a decent amount of capital from a small sum if you do a lot of things right.
3. What do I need to know before I start trading?
In a word, a lot.
How much you have to learn depends on your background. If you have no experience, like Bad Ape at the start of his swing trading journey, there’s a whole world you need to get to know. There’s so many different areas that you have to not only understand, but you have to like to learn them as well.
For trading cryptocurrencies, you should naturally understand the fundamentals of them (e.g. network systems, distributed systems), as well as game theory, and their economics. One of the most important areas you need to learn to love (if you want to make money) is trade management, that is what you do after a trade is executed in order to maximize your profits and minimize risk.
Most people when they get in they are obsessed with getting the right entry and getting the right exit. That is extremely difficult to do in reality. What’s more important is trade management. You need to have a game plan.
Once you identify a coin you want to buy, you must know at what price the trade will go against you (very important!). For example, if the price drops 5%, what do you do? Most people have no idea. Buying and hoping is the worst strategy. Unfortunately, it’s the most popular one. Your game plan must include your buy price and your exit price (both in profit and a loss?).
You should also be aware that you cannot fully prepare for trading, as many skills are acquired through experience and true skin in the game.
4. How can I learn swing trading?
If you’re completely new to this scene, you might feel overwhelmed at first. If you’re afraid of losing money, you might want to consider joining a trading group, where you pay experienced traders to teach you.
However, this takes the decision-making away from you and gives it to someone else, which means that you don’t learn.
There needs to be a balance between learning yourself and learning from others, which takes away your decision making power.
Another way of learning that has been recommended is studying great traders. Get your Google on and find traders who manage trades and risk well.
When you have enough knowledge and feel more confident, you can start to learn by doing. Eventually, you need to get in the game. If you want to be a trader, you cannot sit on the sidelines and trade on demo accounts with fake money. Learn by doing trades (start with small amounts) and see what happens.
Do you best. Fail. Find out what you did wrong. Improve.
At the beginning you might also continue to educate yourself about the relevant concepts. Figure out what kind of trader do you want to be. Do you want to base your trades on technical analysis, sentiment analysis, a combination of both, or something else?
5. What should I be aware of when finding traders to study or follow?
Beware of “genius” traders who will teach their secrets for few hundred dollars. They’re usually bullsh*t. 90% of the time they don’t know how to trade, and instead of trading themselves they will try to sell you a dream. So be very careful with who you decide to follow.
YouTube is one of the potential sources if finding valuable insights. But remember, find a trader who doesn’t want to sell you something. You can check out “Chat with traders” channel on YouTube.
6. Game plan: what should the trading process look like?
Emotions are your enemy. Personally, I assume a more mechanical approach to trading, a rule based strategy (if this happens, and that happens, I will do this), instead of buying something that feels right.
Furthemore, before anything is bought or sold, you have to know much of a given coin you want to buy. And that’s not all. You have to know beforehand how much loss you can take before considering the given trade a mistake (4%, 10%, it’s up to you). You also have to know when you want to take your profits.
7. What’s the holding period?
Holding period depends on the asset or the coin. Swing trading usually covers a few weeks, sometime a few days.
If there’s a streak of gambling in your blood, you can try day trading.
8. Which indicators to use?
That depends on what kind of trader do you want to be. If you want to focus on technical analysis, study indicators, oscillators, and understand price action. If you prefer sentiment analysis, focus on where people talk about the different securities that you’re interested in.
Bad Ape bases his system on Ichimoku. It’s basically a moving average system, which shows the performance of a coin (or asset). It’s very good for quickly assessing a trend on a chart. He also uses a couple of moving averages and Bollinger bands for volatility. And for volume, a combination of normal volume, on balance volume, and VPVR.
9. How much should I rely on instinct?
Instinct is a big part of it.
About a year ago I started a project lasting 3-4 months, where I developed algorithmic trading systems. I wanted to convert my trading into a rule based trading system. I tried to automate everything. That worked well for some time, but it crashed after some time. So I learned to keep some part of the human decision-making.
The takeaway from that project was that I couldn’t rely completely on a system, I couldn’t completely outsource trading decisions.
By studying charts, over time you will develop a deep intuition into what might happen next, which is hard to codify. So don’t exclude the human factor, as a lot of intuition is actually needed to be a successful trader.
10. So the throwing money and seeing what works is very important to develop this kind of trader’s instinct?
Yes and no. It’s a really stupid strategy, but it does teach you some important lessons.
If you have been in crypto for some time, you probably experienced some excruciating, horrible, emotional losses. When you just throw money around, you will make some stupid mistakes.
11. How to deal with setbacks?
Q: What was your biggest mistake made and how did you deal with it?
A: One time, I bought something at the absolute bottom ($1.5 at the time), and four weeks later it shot up to more than $200. It was one of my best trades, it felt fantastic. Especially since I found the trade myself, nobody told me about it. At that point everything was going great for the last 2-3 months, I felt like I was getting on top of swing trading. And when you have that feeling as a trader, that’s exactly the point where things are about to turn around for you. So I took some profit, but soon the coin dived. I went into emotional paralysis, I didn’t know what to do. I was hoping (worst strategy, remember?) that the value would return. I was paralysed, so I just left it. And the value continued to drop, so I basically lost out on a bunch of profits.
How to deal with it? You evaluate what happened, where did you go wrong. Where did you make the stupid decision, what happened. You review your decision process, you try to find your errors, try to find out where to take different positions next time to make sure it doesn’t happen again.
12. With swing trading, does the time of day matter?
When you look at a price chart you have the candles that represent a certain amount of time, let’s say day or a week. What happens in that week is pretty important. It’s like a fight between those that think the coin will have a lower price, and those who think the opposite. What happens in-between is important, but what happens when it closes is vital.
For example, at the end of each month there is a big close of every asset. The close of the candle has very high significance on what’s to happen in the next period.
Dos & don’ts of beginner crypto trading:
- If you want to build wealth that will last, don’t rush into it
- If you’re a beginner, find a balance between preparation (education, copy trading, demo accounts) and learning by doing. You don’t want to lose money at the very start, but you also can’t sit on the sidelines for too long!
- Start with small amounts
- Only buy something, when you have plan when to get out (in terms of profit and loss). Buying and hoping is a dumb strategy. Don’t be dumb.
- Many people when making a trade are leaving the funds with the exchange. You have to understand that if you don’t hold your crypto, it is not yours.
- Take 5-10 minutes every day to check the market.
- Set up advanced orders when you buy, so that if the price goes down, the trade will be sold.
- Beware of traders who want to sell you their course/advice, etc.