Bitcoin Forum

Our last post (https://bitcointalk.org/index.php?topic=861006.0) had a warm reception among the advanced traders here.

We felt like we should produce some help for the new traders too. At BTC.sx (https://btc.sx/?r=5tips) we see a lot of traders lose money from simple mistakes that can be avoided. Armed with this insight and over 60 years of collective experience in finance, we have produced 5 tips that should be a big help to new traders.




5 Tips for Successful Bitcoin Trading
Essential information you should know before placing your first trade

This post is aimed at those with very little knowledge of financial markets.

Bitcoin has encouraged many to take an interest in finance and allows easy access to financial exchanges. Consequently a large number of people are attempting to trade Bitcoin, without any prior trading experience.

At BTC.sx we sometimes see traders make simple mistakes that could be avoided with a basic understanding about trading and investing.

Let’s take a look at the five most common mistakes new traders make and how to avoid them:

1. Do not invest more than you can afford to lose

https://d262ilb51hltx0.cloudfront.net/max/800/1*dP87BcY7IMn9aIrwTT1ykg.jpeg

Any financial investment can produce losses, rather than returns. With a highly speculative investment, such as Bitcoin, there is a high chance that you can see very large gains or losses. By trading Bitcoin, there is also further scope to lose money from poor decision-making.

One should invest such an amount that they feel comfortable with losing completely — be prepared for the worst eventuality. There are two reasons for this.

Firstly, successful investors diversify their portfolio. Allocating too many funds to an asset class increases risk exposure. This makes it harder for gains in other assets to cover losses in another asset.

You cannot lose more than you put in, so don’t put in more than you can afford to lose and you’ll be all right, even in the most negative case. - Rpietila

Secondly, investing more than one can afford to lose reduces an investor’s ability to make good decisions. In particular, there is a risk of ‘panic selling’ when the market declines slightly. Instead of holding throughout a market dip, one who is over-invested may panic and sell-off their holdings for a low price — attempting to cut their losses. This tends to lead to losing more money when the market recovers and the trader buys back at a higher price.

2. Set goals for each trade

Setting goals helps traders remain level-headed during periods of extreme volatility. This is highly important for Bitcoin trading. When placing a trade, determine what price to take profits or cut losses in advance.

The benefit of this is that it is easier to prevent trading decisions based purely on emotions. For example, a trader with no target price may make a profitable trade, become greedy, and then fail to realize their profits while the market is still on their side.

This chart shows the typical emotions an investor may go through and how they make it harder to ‘buy low and sell high’.

https://d262ilb51hltx0.cloudfront.net/max/800/1*0tpcgBQ51awHWDhdPy2qUw.jpeg

The use of goals / price targets can prevent traders becoming greedy when experiencing euphoria and despondent after a market crash.

3. Learn how to read charts

Although technical analysis is a difficult skill to develop, new traders at a minimum should know the basics of chart reading to identify market trends.

The most widely used Bitcoin charting tool is Bitcoin Wisdom (https://bitcoinwisdom.com/markets/bitstamp/btcusd). Despite looking overwhelming at first, it is actually very intuitive. Here are the basics a new trader should understand:

Candlesticks - these are the rectangles and lines that resemble a candlestick shape. They are used to show what the price has done within a chosen time interval, which in this example will be one day.

https://d262ilb51hltx0.cloudfront.net/max/800/1*G7g3tvOz4XRcxFX9eZ4icg.png

Take a look at the candlestick highlighted by the blue box. There are several pieces of information we can gather from this single candlestick:

Opening price — this is the part of the rectangle that is horizontal to the candlestick to the left. On this day, the price opened at approximately $400 (which was the closing price of the day before).

Closing price — this is the part of the rectangle that is horizontal to the candlestick to the right. On this day, the price closed at approximately $378 (which was the opening price of the day after).

Price direction — as the closing price is less than the opening price, the price of Bitcoin fell, therefore the candlestick is red.

Highest price — the highest point of the stick shows that, during this day, the price reached approximately $407.

Lowest price — the lowest point of the stick shows that, during this day, the price fell to approximately $368.

Trading range — the difference between the highest price and the lowest price shows the range that the price was trading in.


Order book — this is a list of the prices and quantities traders are willing to buy and sell Bitcoin.

https://d262ilb51hltx0.cloudfront.net/max/391/1*GmjoL5vhYY834J4w7vu7jg.png

The ‘asks’ (sell orders) are listed in the top half, and the ‘bids’ (buy orders) are the listed in bottom half. The difference between the lowest ask ($361.95) and highest bid ($360.95) is known as the ‘spread’.

The second section with the scroll bar shows live trades, which can be used to see what is happening in the market right now.

Lastly, Bitcoin Wisdom projects how the price may move based on the order book. This can be indicated by the green and red lines at the end of the chart.

How can a trader use this information? It allows short-term support and resistance levels to be identified quickly.

For example, if there is an order to sell 5,000 Bitcoin at $362, the price will have a lot of resistance at this level. This is because buyers will fullfil the cheapest sell order available to them and, given 5,000 Bitcoin is a huge quantity, this will be sufficient to satisfy buyers for a few days. It is only when this order has been fulfilled, there is potential for the price to move above $362.

It is worth watching the live trades and bids / asks being fulfilled to get a feel for how an exchange works. Keep in mind that a buyer will want to buy at the cheapest price for their desired quantity. So they will buy as much Bitcoin as possible at the cheapest price, and then the next cheapest price if the original ask contains an insufficient quantity of Bitcoin. It is this scenario that increases Bitcoin’s price — or decreases Bitcoin’s price in an opposite scenario.


Logarithmic scales — using just linear scales makes it difficult to track Bitcoin’s price over a longtime span. This is because linear scales have with Y Axis values of equidistant. This linear Y Axis is easily distorted by extreme values, which Bitcoin’s price is famous for recording.

In contrast, logarithmic scales have a Y Axis that changes values according orders of magnitude. This prevents chart distortion and can reveal hidden trends in Bitcoin’s price. Observe the difference below:

Linear Bitcoin chart:

https://d262ilb51hltx0.cloudfront.net/max/1186/1*uU1WEvsAchNcdK8iGI2XJg.png

Logarithmic Bitcoin chart:

https://d262ilb51hltx0.cloudfront.net/max/1177/1*t6JwI7xM_BBcZasWvGgmWg.png

The logarithmic chart has revealed another rally that was completely hidden on the linear chart. This is useful to assess the long-term trend of Bitcoin.

4. Do not set stop losses too low

A stop loss is an automatic trigger to liquidate your position if your losses reach a certain value — essentially stopping you from losing any more. They are a good tool to take advantage of.

However, at BTC.sx (https://btc.sx/?r=5tips) we recommend that traders do not use a stop loss that is too small. Choosing 10:1 leverage means that your deposit is 1/10th of the position size. This deposit determines the stop price, the price at which a position can drop to until the deposit can no longer cover the position’s loss. At $200, the default stop will be $20 away (or 10% of $200). Anything less than the position’s default stop will increase the risk of a position closing out very quickly because of minor fluctuations in the price of Bitcoin.

Here as an example from the rally of Winter 2013 to demonstrate this:

https://d262ilb51hltx0.cloudfront.net/max/1192/1*-T0MDCOxwXaUgf_XcvlOZA.png

In this hypothetical case, a trader with a default stop at 10:1 would have lost out on a huge rally. They bought-in at the right time, but because their stop loss was set too low, their Bitcoin were automatically sold at a loss during a minor fluctuation.

It is important to note that lower leverage options result in a larger stop and as a result is considered a much safer way of exploring the basics of trading.

5. Close unprofitable & leveraged positions within 24 hours

Leverage is borrowing or lending an asset in hope that it appreciates or depreciates, respectively. At BTC.sx (http://btc.sx), we give traders the ability to enter long (buy) or short (sell) positions with 2:1, 5:1 or 10:1 leverage.

If a trader shorted 1 Bitcoin at 5:1 leverage, for example, the total investment is 6 Bitcoin. To make a profit the price must fall, allowing the owner to reclaim ownership at a lower price.

However, the price of a Bitcoin must fall sufficiently to cover the trading fee and the interest fee charged on borrowing the 5 Bitcoin. Do not fear if this sounds complicated! We have integrated a breakeven calculator into our trading interface to automatically show what price movement is required to return a profit.

Our daily interest charge is applicable up-front for every 24 hour period with the first 24 hours being free. Thereafter a trader must ensure that there is sufficient balance in their account to cover the cost and ensure the position remains open for each subsequent 24 hour period. In the foreign exchange trading markets, this is referred to as Rolling Spot FX (http://en.wikipedia.org/wiki/Rollover_%28finance%29). As the Bitcoin market is volatile, it can be hard to make a daily profit when the price is prone to change direction quickly.

Put simply, we recommend that inexperienced traders close unprofitable positions within 24 hours to avoid paying re-occurring interest.

Summary

We hope this post has been informative. The key takeaways from this post are:

Do not invest more than you can afford to lose

• Do not invest more than you can afford to lose
• Set goals and target prices for each trade
• Learn how to read charts
• Do not set stop losses under $20
• Do not keep unprofitable positions open for longer than 24 hours

Nice post on the basics  :)

Best trading/gambling advice I ever received is don't trade/gamble.

Oh Shut the fuck up. What are you doing in speculation then?
You are gambling by "investing" in Bitcoin

There is a world of difference between holding bitcoin and trading with leverage. Now ssh noisy troll.

This advice is retarded as hell. Trading/gambling is a job for many.

Basically its only a good advice if the target is someone stupid, because they obviously wont succeed. Otherwise - no.

Thank you

While we see trading and gambling a very different activities, we broadly agree with you. The best option for a 'trader' who has done no research or analysis is to hodl. We are doing our best to educate our new traders to make better informed decisions.

Nice article and thank you for taking the time to write it down.

However based on my Bitcoin trading I have a problem with points 4 and 5.
I am merely stating my view on your points based on personal experience.
I am a novice trader but have been trading cryptocurrencies for quite some time.

Do not set stop losses too low
In Bitcoin stop-losses are very dangerous. Reason for this is the high-volatility.
Set them too close and you get a guarantee that it gets stopped-out at a loss every time.
Set them too low and you still run the reason to get caught by a dump but losing a shitload of money in the process.
Yes having a stop-loss is generally a good idea in trading but with the pump and dumps in Bitcoin it will kill your account.
Big dumps are nearly always followed by a near equal pump (and vica versa) so waiting before getting out can save you a lot of money.
Instead of a stop-loss monitor your account vigorously.

Close unprofitable & leveraged positions within 24 hours
Stopping your posisiton within 24hours assumes high risk day trading. I would not advise this type of trading for beginners.
If you begin with trading, trade on the day charts and not the 1 or 5 minute charts.
Bitcoin has easy to follow long-term trends. For example a stochastic RSI combined with trading based on the long term trend (EMA) is a good and easy way to trade.
There are more easy to follow methods like Bolinger Bands and MACD.
Day trading (especially with a leveraged account) is not easy and mostly unsuccesful in the long term.

Leveraged accounts
Using leverage is not advised for beginner traders. You run the risk of getting squeezed and losing it all before you know what is happening.


Points I would recommend adding are

Risk/Money MANAGEMENT
When starting a trade you calculate your position based on what you are allowed to loose. Make sure you can lose no more than 2% on a single trade and have enough margin left so you don't get liquidated.

Take profits
High volatility can cause insane pumps. Having a take profit 10% to 20% above the current price is a good thing to have since you can catch these insane pumps before the dump happens.
You can raise these levels when the price goes up.

Don't invest more into fiat than you can afford to lose

Don't invest more into fiat than you can afford to lose

FTFY :)

Great suggestions!

Yes I agree that monitoring your account is better than a stop loss. Just need to be careful not to over-trade when doing this. Sometimes it can be tempting to make a trade because you are bored, and not because it is a good decision.

I think we could perhaps make a future post on these easy-to-follow trends. A lot of the posts here assume people know this stuff, which is not always true.

Lastly, taking profits is vital. As the chart above shows, it is all to easy to become greedy when you are making a profit. I think there has also got some psychological effects of wanting to keep a profitable trade open for longer as it looks impressive / makes the trader happy to see.

Of course! That is why a good investor will have a range of fiat, shares, bonds, commodities and, last but not least, Bitcoin :)

Thanks for the effort of posting this. I even learned a few new things ;).

No problem. Comments like this make it worth the effort  ;D

The market is chaotic and manipulated by big whales. How do i predict that so it's not all luck? no matter how much TA i read i always have the feel im just gambling.

The trick is to figure out what the whales are doing and trade in anticipation of their movements.

As one poster said, longer term trades. ie Daily charts. No matter how much manipulation there is, on the longer term, there is so much other trade activity, a Daily chart smooths this all over and the actual trend is revealed.

Short term charts has it's difficult points and not all strategies work on it. But short term trading has it's pay-offs too. Quick scalps like what we are seeing now during this correction are not possible while staring at a daily chart. ;)

The difference between gambling and trading is distinct.

For both you don't know what the outcome will be.
With gambling you win or lose.
With trading you win some or you lose some.


What's the difference.
If you win 40% of the time with gambling you will always lose.
If you win 40% of the time with trading you can make a profit if you enter and exit at the right time.


Added bonus for trading is that the market is formed by people or bots which are both predictable by nature.
He whom can predict their behaviour can use it to benefit themselves.

i didn't read it and i don't like it

Thanks for the feedback. I certainly sounds like you are an experienced trader.

I will add to your last point - in case anyone is considering using our platform - we include our commission on the profit calculations shown to users.

My tip for new traders: short bitcoin!  ;D

How about quit trading and speculating?

I agree with:


The other tips are only valid if you invest for fiat profit - which is stupid, if you ask me - and believe in technical chart analysis.

Fundamentals are more important to me than charts. I doubt that knowing the basics in TA will get you anywhere - but I agree on the basic premise that you should contain your losses, so you can enjoy your hobby a little longer... ;)

ya.ya.yo!

+1

Another Tip.

When entering a trade never do a market order. Always put in a pending order and wait for it to get filled.
You will always feel you are missing the boat but this is normal. Leave it for an hour or so and re-evaluate.

A market order is dangerous. Let's say you open a market order; it is not uncommon for it to get filled with very small orders. This can increase your entry price by quite a lot making it a longer wait for profit.

( edit: someone already posted this one :) )

Short or go long depends on what the trend is :).

I made the mistake of chasing the price upward too many times myself. That's good advice you've given.

This is true! i feel it :D
Thanks for your tips, actually this is bassic of trading, all trading currency.

Glad to be of help!

Tip #6: do not play at the bucket shop