Learn to Trade; OH sh*t, I can’t believe its free! Part 1.
By Trader Fibonacci Fiddsy
Welcome to my — learn to trade; Part 1 of my ‘OH sh*t, I can’t believe its free!’ series.
If you are reading this, you are probably not new to Cryptocurrency and are no doubt looking to expand your knowledge into the world of trading. If you are new to Cryptocurrency, I highly suggest you shoot over to a beginners Cryptocurrency guide I wrote covering a vast overview of all things Crypto (including some basics of trading that will get covered here in more depth), it is primarily based around Australian Cryptocurrency services but do not let that scare you off, majority of the information is general and is relevant no matter where in the world you are from!
So quickly — WHO AM I? First off, I am a cryptocurrency enthusiast who has been heavily involved in the cryptocurrency market since mid 2017, I have traded cryptocurrency as a business since early 2018. In 2019, I started writing some free educational articles which has seen over twenty two thousand visits at the time of writing this series. In late 2021 and early 2022, I decided to expand my trading business to include Cryptocurrency mining and have since started a small mining farm. In 2023, I am looking at up scaling my mining operation as well as finishing an ebook that is a far more detailed and in depth guide covering everything cryptocurrency related.
And during all this time, I have been a frequent contributor to many public and private groups offering help to beginners and even mentoring people on their first steps on how to trade.
Where do we begin?
I wont lie, part one isn't the most exciting of content but honestly, it is the most important and it would be irresponsible of me to leave this section out or even leave it to later in the series!
Learning to trade isn't difficult but learning to be disciplined and also becoming a successful trader IS very difficult. As the saying goes — there is more than one way to skin a cat — the same is true for how you will trade, what you may find resonates best with you and what you will find as most successful strategies. This series is written to save you hundreds of dollars in courses, to help you learn the basics so you can build a solid foundation and begin your journey as a trader!
Lets not beat around the bush here, trading is not easy.. In fact most people fail miserably! If it was easy, everyone would be doing it! It always reminds me of gamblers, they love posting their wins but never their losses and trust me, those who have big reckless wins are going to have huge losses they hide from everyone! During bull runs, most people think trading is easy when the entire market is going parabolic — well obviously, the entire market is going parabolic! Almost every coin is going to increasing in price during those market conditions, this doesn't make you some sort of trading genius, you are not some ‘wolf of wall street’ prodigy. You are a product of a favourable market condition and no doubt just got in at a lucky time! When the market turns (which it always does), these people get absolutely smashed and generally lose majority of what they made during those peak and ideal market conditions!
However trading doesn't need to be difficult, I know that sounds like I may have contradicted myself and perhaps I have but please bare with me!
To be a successful trader requires a strong mental mindset. YOU WILL lose money. Accept this fact. Trading will take time to learn. Just like any other job or hobby, no one was a master on day one! The next fact you need to come to terms with is that you will only be as good as your RISK MANAGEMENT. Lastly, bigger accounts do not equal successful trades, If you can’t turn profit on $100, you won’t turn a profit with $1000, $10,000 or even a $100,000.
So lets dive a bit deeper into what I just said!
A Traders Mindset!
Trading is the equivalent of playing blackjack but counting cards! The goal here is to stack as many probabilities in your favour as possible for the highest chance of a successful trade but also knowing when to ‘tap out’. You do this by learning T.A. (technical analysis) combined with risk management. Technical analysis is used to consistently make high probability trades, while risk management is used to keep your losses as low as possible when a trade goes in the opposite direction.
Unlike an investor who is buying a handful of assets at a price they think is low and hoping to sell at the highest price they can, your goal — while similar — isn't about trying to buy the bottom and sell at the top, its about profiting on the chunks in between. Its about taking your bias out and trading whatever coin looks good from a technical standpoint. This means your ultimate goal is to compound your profits to perform better than the market/asset you are trading. If you can’t out perform the market, then honestly, trading might not be for you.
A simple example of this would be an investor buying $1000 of Bitcoin and doubling their money in one years time, which is quite a reasonable goal considering Bitcoins price history.
A Traders goal is to successfully compound their profit therefore out performing Bitcoins ‘natural’ price growth. Now lets say the trader in this example is making around 10% profit per month (also a very reasonable target) starting with the same amount of capital of $1000 with a 12 month end goal.. In that 12 month period, that 10% monthly profit would have compounded to around $3200 in value out performing the investor and the asset substantially.
Obviously this is a very simple/rudimentary example but a little bit further down this article, I’ll share with you some recent real world examples.
Understanding your mindset!
There is a few very common word ‘problems’ you often see posted on various Facebook groups and communities. Generally they all go something like this:
A man buys a goat for $60.
Then, he sells it for $70.
Then, he buys it back at $80 but sells it again for $90.
How much did he make?
The answer is — He made $20 profit. The man made two separate trades. His first trade, he made $10 profit. His second trade he also made $10 profit. The price of the asset is irrelevant, all that matters is the profit he made in those trades! If you look at it from another angle, an angle I prefer to show the people I have mentored, is instead of dollar value — look at the percentage increase in profit.
In this example, the man sold his goat for 16.7% profit on his first trade. On his second trade, he made 12.5% profit.
The reason I like to deal in percentages is because a lot of the people I have mentored are generally looking at trading for a supplementary income and not a primary income so they tend to have smaller amounts of capital to trade with. Some have even asked me if its even worth trading if they only have a few hundred dollars to trade with! YES! It is worth trading even with that small amount.
As I mentioned above, if you cant make a profit with $100, you are not going to make a profit with $1000, $10,000 or $100,000! Everybody has to start somewhere. Recently I have been mentoring a friend who wanted to dip his toes into trading and he asked me that very question, I got him to make a trading account and told him to deposit $100 into that account, I also did the same to prove a point. We both used zero leverage and only spot traded (DO NOT USE LEVERAGE UNTIL YOU CAN SUCCESSFULLY SPOT TRADE!!).
In three months he has managed to double his account trading off some very basic strategies and limited market knowledge. In that same time frame — with barely any time spent on that account — I turned my $100 account into $485. That is a 385% increase in three months. Now if I were to continue the current projection (which is doubtful) and kept compounding my profit, I cold potentially turn that $100 into well over $10,000+ in a year without even using leverage. My friend, if he can continue to double his account every 3 months will be looking at turning that $100 into $1600 by years end. We have been taking it slow but if you can’t do the basics right, you are not going to be successful.
In that same time period, Bitcoin has gone from around $16,500 USD to $22,500 USD — an increase of about 36%. That means myself and my friend have both successfully out traded the market.
Another reason I like to trade in percentages rather than looking at dollar value increase is because it helps separate you mentally from the monetary aspect of trading. Casino’s do the same thing with the use of ‘chips’ representing money value. While not the main reason, one of the reasons is that it is proven to add a little mental separation between the gambler and his valuable money. While in this case, its detrimental for the gambler, I find it a huge advantage as a trader being able to separate myself from the monetary aspect. As mentioned, you will lose money trading. It’ll help remove the emotion out of trading.
Risk Management!
Now we can get into some ‘juicy’ content! A trader is only as good as his or hers risk management. ← FULL STOP.
The first and most important rule of trading is to preserve your capital. Every trade should have a desired entry point, a stop loss/invalidation point and a take profit. Meaning every trade should have a plan and you should execute that plan as methodical as possible removing any emotion associated with it. Every trade should have a stop loss in place at a predetermined level once a trade is taken. Yes, it can be annoying getting a string of stop outs in a row but its far better than the alternative of potentially getting your account balance wiped out.
The goal is not to make money but to preserve the capital you have and to build on that amount. You generally do this by taking the trades with the best probability of success. You want the best possible risk to reward ratio. Generally speaking, this means that ideally you want your entry point to be as close to your invalidation point as possible for minimal loss and maximum reward.
As a simplified explanation — Trading is buying support and selling at resistance. Therefore, your entry should be as close to the support as possible, the stop loss should be below the support indicating that if the support fails, the trade is invalidated and lastly, the take profit should be at/just before the resistance.
FYI, support and resistance are price levels on charts that act as a barrier to the price of the asset. Support is a price level that traders have and will historically buy the asset at and resistance is a price level that traders have and will historically sell the asset at.
Later in the series, I’ll show common places for entries and exits but until you learn the basics of technical analysis, these areas will not hold much importance or value to you.. YET.
Calculating your Risk to Reward!
When you are scanning your Tradingview watchlist and narrowing down potential trades, the risk to reward ratio comes into play. Needless to say, if a potential trade(s) tick your strategies boxes, you can calculate your risk to reward ratio. The lower the risk and the higher the reward, the more potential profit the trade has.
Risk/Reward Ratio = Potential loss / Potential Profit
So as an example, one of my trades take profit is 12% from my entry and my stop loss is 4% from my entry.
Risk/Reward Ratio = 4% / 12%
1/3 (0.33) = 4% / 12%
My risk to reward ration in this instance is 1/3.
The calculation of Risk/Reward will become an important tool in refining your trading strategies and also narrowing down your trade selection. As you can see below, with a good risk to reward ratio, you can still be profitable even if you have a low win rate.
Right — back to risk management!
The universal risk management for beginners and conservative traders is a risk of no more than 1% of your account on a single trade. The most common risk management is whats called the 2% rule (risking no more than 2% of your capital on a single trade) and 3% is considered a higher risk management and is usually for more high risk professional traders. As a beginner, you should be looking at conservative 1% risk management!
So now that we know what our risk management is, we need to learn how to calculate our position size.
Below this first formula is the proper method for calculating position size but if you struggle to understand how to implement the formula, It’s OK. There is this easier version that is far simpler to understand tho not nearly as structured or proven.
In short, this express version of risk management is to not use more than 10% of your capital in a single trade. Do not risk more than 1% of your capital in a single trade.
Example, if you have $1000 in your account, do not place a trade larger than $100 (10%) and do not risk more than $10 (1%) on that trade.
Position size = Account size / 10
Max spot loss (roughly) = Account size / 100
I wouldn’t say this is great risk management but it’s better than nothing and it does work if your T.A. is good. Stop losses should not be placed at a percentage distance, they should be placed at the invalidation point of the trade which is where this ‘risk management’ formula falls short.
The proper way to calculate your position size based off your risk management!
This is the proper formula on how to calculate your position size based off your risk management. For arguments sake, we are going to presume you have $10,000 capital in your trading account. Your risk management is 1% meaning you are willing to lose a maximum of 1%/$100 on this single trade. You have planned where your stop loss/invalidation point is on the trade. Lets say its about 4% from your entry point.
- Account size — $10,000
- Account risk — 1%
- Invalidation point/stop loss distance — 4%
Based off this information, we can now calculate our position size for the trade using this position size formula.
Position size = account size x risk / invalidation point
Position size = $10,000 x 0.01 / 0.04
$2500 = $10,000 x 0.01/ 0.04
Your position size on this trade would be $2500. Needless to say, the closer the entry is to the stop loss, the larger the position will be. The further the entry is from the stop loss, the smaller the position will be. I highly suggest getting comfortable with this formula.
Okay, now lets look at that example account I made that is currently at $485. My risk management is 2% and I have worked out that my entry point is 3% from my stop loss. Using the same calculation formula as above.
Position size = account size x risk / invalidation point
Position size = $485 x 0.02 / 0.03
$323 = $485 x 0.02 / 0.03
My position size would be $323 on this trade. But what happens when you don’t want to tie up all your capital in a single trade or your position size is the same OR even bigger than your accounts capital..? Welcome to how to properly use leverage! Unfortunately, that’s a discussion for another time and place. You should not go near leverage until you learn how to spot trade successfully.
You can however ‘manipulate’ the formula by adjusting your account size. Your risk management will stay the same but you can calculate the account size at (as an example) 5%, 10% or 20% of total account balance which will free up more capital to be able to take multiple trades at once. In this case, the formula stays the same but the account size is adjusted to reflect how much of your account you are willing to place on a single trade. Below is the adjusted account size from the above example to reflect using 20% of the $485 capital, 2% risk and 3% stop.
Position size = account size x risk / invalidation point
Adjusted account size = $485 x 20%
Position size = $97 x 0.02 / 0.03
$64.7 = $97 x 0.02 / 0.03
I have been trading this market since 2017, I have gone through the motions of over trading, under trading and everything in between. Its a crappy feeling missing out on awesome trades because all your capital is tied up in either one trade or many trades. If I were to do it all over again, as a beginner I would limit myself to a max of around 4–6 trades at any one time. Fast forward to now, I generally max my trades out at around 12 at any one time but my preference is a lot lower.
NOW WHAT?
Right — You understand this will take time, that you will win some and lose some. You have figured out Risk/Reward Ratio and also Risk Management. But a huge step that is often over looked is a trading journal. The power of documenting each trade is an incredible tool for not only self reflection but also working out tax and as backup documents should an exchange go bust.
Trading Journal
A trading journal is how you refine your trading. In black and white, it shows you the raw data of what was successful, what wasn’t successful, what your risk/reward success rate is, profit/loss, account balance, reason for taking the trade and any other valuable information you may wish to include. By having this info, you can remove your lower probability trades and analyse mistakes or things you have missed in past trades so you do not make those same mistakes in the future.
Some people do a journal by taking screenshots of each trade they take, others have a hand written ledger/journal but in my opinion, the best option is to setup a simple Excel sheet with any information you deem relevant. I do highly recommend a detailed description of why you took the trade and lessons learnt from the trade.
TradingView
If you don’t have TradingView yet, click this link and sign up to the free version. You are limited on the amount of features available but when starting out, the free version is completely fine. If you are looking at a paid version, try wait till Black Friday sales as you can pick up annual subscriptions for a fraction of the usual price. Using the link will give you up to $30 off when upgrading to a paid version!
A FINAL NOTE
When the time comes and you have learnt some technical analysis, please revisit Part 1 again. This part may feel beyond where you are currently at in your trading journey, however It will be an integral part of how you trade and how successfully you will be or become as a trader.
UP NEXT — Part 2!
We’ll take a deep dive into the basics of trading, price action and candle sticks for your T.A. (Technical Analysis) including trend and start looking at some charts showing real life examples! Click below for Part 2!
DISCLAIMER
NOT FINANCIAL ADVICE– The Information in this article, learn to trade; Part 1 of my ‘OH sh*t, I can’t believe its free!’ series, is provided for educational, informational, and entertainment purposes only. The Information contained in or provided from or through this article is not intended to be and does not constitute financial advice, investment advice, trading advice, or any other advice.
The Information in this article is general in nature and is not specific to you the user or anyone else. You should not make any decision, financial, investment, trading or otherwise, based on any of the information presented in this article without undertaking independent due diligence and consultation with a professional broker or financial advisory.
You understand that you are using any and all Information available on or through this article at your own risk.
RISK STATEMENT– The trading of Bitcoin, alternative cryptocurrencies has potential rewards, and it also has potential risks involved. Trading may not be suitable for all people. Anyone wishing to invest should seek his or her own independent financial or professional advice.
