Why a Trading Plan is Essential to Trading Cryptocurrency
A trading plan is necessary to your success for two immutable aspects of cryptocurrency trading: 1) Trading crypto is a zero sum game, and 2) every trader is trying to win. Consider this; when you buy or sell a crypto, there is another trader selling or buying to you. Both of you want to make a profit, but only one will. That’s a reason why firms hire well paid PhD level mathematicians and engineers to develop trading algorithms.
Here is another way to look at it: if you make trades randomly in a stable market, you have a 50% chance of making profit. The price is equally likely to go up or down. However, a percentage loss is always more impactful than a percentage gain. For example, say your account starts with $100. You take a 10% loss and a 10% gain (or gain and then loss) and you will be left with $99.
To further illustrate, check Figure 1. We simulated two account both starting at $100 and made 2% trades either at a loss or a gain. The loosing account accrued all of it’s losses in the beginning whereas the account with the gains only received a majority of the gains at the end.
The point of a trading plan is to create a framework that enables you to trade a profit more often than trading at a loss.
Figure 2 is an example of how trading plans can help. We simulated 20 accounts starting at $100 and made 1000 2% trades on each. The accounts either at a 50%, 51%, or 55% chance of making a positive trade. Basically three scenarios: gambling fir a 50/50 shot, trading with a slight edge, and trading with a plan that has a 5% benefit.
As you can see, trading with a 50% chance of success resulted in a loss 55% of the time. Trading with just a 51% chance of success resulted in a much better chance of profit at 60%. Trading with a 55% chance of success resulted in profit 100% of the time.
Granted, these are simulations and the real world rarely manifests so nicely, but the point is that trading with a better than not chance at success will make you money, and trading with a 50/50 shot will lose you money.
A trading plan is a great tool to push the odds into your favor. But what exactly is a trading plan? What does it contain?
What is a Trading Plan?
A trading plan is a set of rules that outline how you trade. It sets rules for how you enter into a position, exit a position, and on what timescale you trade. A trading plan is designed to take the emotion out of trades and allow you to operate on cold hard logic. In crypto, so much price action can be derived from news cycles and traders emotion, that it is important to have an anchor to reality so that you are not swept away into loosing positions.
Trading Plans are also highly personalized. They are something that you make yourself, for your trading style, and that grows along with you. As your framework results in either gains or losses, you can change them to better suite your needs. However, changes should all be based on data, and not emotion. Take time in creating your trading plan. Become a student of the market, gain insight into the mechanisms of crypto, and be disciplined.
Crafting a Crypto Trading Plan
Your trading plan will be unique to the way you trade, but the common element between all trading plans is that it relies on discipline. The only way for you to craft a winning plan is to stick to it. This will give you the insight on how to fix parts that are broken, and what parts that are working and should be kept. That being said, the part of the trading plan that helps you enter and exit trades is unique to you. This makes it difficult to give you an exact answer on how to create a trading plan, but here are several key elements to consider as you craft your own.
Planning Your Entries
Trading should be based on your technical analysis of the crypto. Your analysis can be be based on moving averages, support & resistance levels, or some other indicator or trading criteria you use, as long as it has some sort of logic driving it. While some entry and exit strategies are simply based on the price crossing above or below a SMA, we are going to look at a strategy that uses support and resistance levels to gauge the amount of risk in our trade.
For example, say your coin is hovering right at $50 and you have identified resistance and support levels at $75 and $25. Buying now results in a Risk/Reward ratio of 1:1. The price as an equal likelihood of gaining or losing you $25. Your entry plan should always revolve around the amount of risk you are willing to take for your potential profit. Once the amount of risk is acceptable to you for your potential reward; buy.
Using the same chart, the price drops to $30. This now gives you a potential loss of $5 to make $45, or a Risk/Reward of almost 1:9. This is a much better ratio. Your Trading Plan could either have you buy here, or wait for the price to touch the support level and rise again. It all depends on the amount of risk you are will to take and the way you trade.
Your entry strategy should be all about determining how much risk you are willing to take for a profit. You should give thought to what Risk/Reward ratio is acceptable to you, if you want the price to touch a support level before buying, if you want to look at volumes and SMAs, or any other technical indicator you like (like TD Sequential). You trading plan should codify your risk tolerance so that you do not have to put as much thought into entering a position: either it matches your plan and you go for it, or it doesn’t and you pass on it.
Planning Exits and Making Profits
Exit plans come in 2 parts. The most important part is your stop loss. This is the part that actually limits you to the amount of risk you signed up for. Again going off the above example, if you have done your calculations at a level of $25, then your stop loss should be there too. Always, always trade with a stop loss.
The second part is when to take your profit. This part, again depends on you. Are you the trader who likes to use trailing stops? Do you want to gradually step out of the trade by taking small profits at $35, $40, $45, and so forth? Or do you just want to sell everything at $75 and move on to the next trade? You can even use a combination of trades (Craft-Crypto Pro is great for that!). The choice is yours.
A personal favorite of mine is to move my stop loss with price, which is a bit different than a trailing stop loss. Once I enter into a trade, I wait for the price to be above a break even point in terms of fees and other factors. Then I move my stop loss to be at or above break even. This means that I have not locked in little to no risk in my trading. As the price continues to rise, I can choose to move the stop loss up, or eventually put a trailing stop loss on my trade and let the trail exit the trade for me.
There is just some satisfaction for me once I move my stop loss and know that for certain I have made profit.
Selecting your Timescale
Unless you are simply buying Bitcoin for the long term investment, time in trade is an important consideration. Are you looking for multiple trades per day? or several per month? Making that decision and then choosing and sticking to a timescale will help simplify your decisions. Again, there is not perfect answer for this an entirely depends on your trading habits, the time you can dedicate to trading, and other factors like this.
After you choose a time frame to trade in, consider picking a higher time frame to find general trends. For example, I am partial to the 4hr time frame, but I use the day candles to find general trends and support/resistance levels. The same could be done for the 30min candles with the 4hr candles, etc.
You may also consider if you want to get out of a trade after a certain amount of time has passed. Lets say that you enter into a trade, and the crypto trades sideways for days. Given the nature of crypto, you could have missed out on other trades in other cryptos be being locked into a sideways market. As such, your plan could include a provision to get out of a trade if you have not made a profit. For example ‘Exit trade after 3 days if under 1% profit.’
Choosing Your Core Cryptocurrencies to Trade
Trading plans involve discipline and a key aspect of discipline is focus. Your efforts should be focused on only a small group of markets. This will let you study, research, and learn all there is to know about your selected cryptos.
Given the sheer number of cryptocurrencies on Binance, and how their prices are often effected by the news cycle, drilling down to a select few coins will also let you stay up to date on all the news relating to your coins. This can be invaluable to your trading style.
That being said, it is also worth getting to know how the mechanics of coins work. For instance, if you wanted to trade Ethereum, do you really know how it works? What about BAT? Do you know how a zero-knowledge proof works? Or even what hashing or digital signatures are?
At the end of the day, you are trading crypto and spending time in the market to try and enrich yourself. You really should have at least cursory knowledge in the core mechanics of your coins. Doing so will help you understand how new developments could effect you, as well as confidence in the technology in general.
It may seem complicated, but you really should read your coin’s whitepapers. They can be fascinating after giving them time to digest.
Keep Trading Crypto in Perspective
Many, myself included, got into crypto hoping to become millionaires overnight. Chances are that if you are reading this, that hasn’t happened for you yet. Trading for many people is a career long activity, and it is very much worth keeping that in perspective.
A large part of a Trading Plan is controlling emotion to make informed trades. knowing the timescale you’ll need to reach your dream can help out significantly.
We developed a calculator that can help you figure how many trades you’ll need to make per month to reach your dreams. Unlike other calculators, this one also includes trading that go south.
For example, I would love to retire in 10 years. I currently have just over $700 invested in crypto, and would like to have $40 million when I retire (we can all dream, right?). I like to target 5% gains with my trades, and so if I trade profitably 60% of the time, I need to make 10.3 trades per month (1 every 3 days!) to reach my goals. However, if I work on tuning my trading plan, and reach 80%, I will only need to make 3.2 trades per month (less than 1 per week!).
What this really shows me is that for me to reach my goals, it is entirely acceptable to craft a plan that waits days to find the perfect setup. After all, losses are more impactful that gains, and it is hard to go broke by making a profit.
To Wrap It All Up
Trading Plans are essential because they provide the foundation for you to trade with confidence and logic. Trading like this is critical because trading cryptocurrencies is a zero sum game; your gain is someone else’s loss.
To reach your goals you need to trade with a better than 50/50 success rate. To do this, you will need to experiment and collect data on what works and what does not. A Trading Plan, again, provides the framework.
Overall, to win at trading you need to push the odds into your favor. The best way to do this is to trade on logic and a plan, and not emotion. This is what creating your trading plan and having the self discipline to follow through is all about.