A beginner’s guide to crypto trading Part I — Strategic asset allocation
In this 3-part series, we ask a professional algorithmic trader, Ben Eacrett, for his advice on profitable trading strategies anyone can start using today.
Learning how to trade and getting successful returns is far from easy. It takes work to fully understand the market and to master winning strategies and trading skills.
From beginners to trading experts, many people in the space can quickly get overwhelmed by the abundance of tricky rules, tactics, and advice coming from various channels.
Although there are no holy grails (trading in a way that is consistently profitable is really hard), in this series, we will talk about 3 easy-to-implement crypto trading strategies that can help anyone make more consistent returns.
Strategy #1: Strategic Asset Allocation
A fundamental tactic that can be applied effectively not just to cryptocurrencies, but to any asset class or portfolio, is strategic asset allocation. The approach is deceptively simple — determine the % of your investment capital you want to apply to each asset group, then monitor your portfolio and periodically rebalance it back to these %’s — but can provide great returns at reduced levels of volatility.
Let’s work through this in a little more detail.
Step 1: Determine your mix
Start off by doing some top-down research. Ask yourself two questions:
- What are the market assets you want to be exposed to?
- What % of your capital do you want to allocate to each asset?
Write these down. Don’t forget that cash/stablecoins are a viable segment, and can be particularly useful when the market is moving against you. Never be afraid to liquidate your assets for cash and wait it out when things get hairy.
Step 2: Do more research on each of the assets you’ve chosen.
Have good reasoning behind your asset selection and set a threshold that will trigger rebalancing in your portfolio.
For example, you could set your threshold to 10%.
If you start by investing 50% in BTC and 50% in ETH, after a while the price movements will have caused these ratios to shift. If they got to 55% BTC and 45% ETH they’d have reached your 10% trigger, so you would sell some BTC and buy some ETH to take them back to your strategic weights of 50% each.
This strategy is easy to follow and naturally causes you to capture some profit on winners and benefit a bit from relative value effects. It is important to keep an eye on your holdings — make sure to do research. You will likely want to get rid of certain cryptocurrencies in favour of better performing projects.
It can also reduce the wild swings that can come with allow your portfolio to become unbalanced, giving you similar overall returns without the beta that comes with a simple HODL strategy.
Step 3: Automate
If you’re tech-savvy, portfolio rebalancing is a great way to dip your toes into algorithmic trading. Most trading platforms will have an API that can be used to automate this strategy, making it relatively hands-off.
This article walks through a simple Python script that can be used to automate rebalancing.
Failing to plan = planning to fail
While planning isn’t a trading strategy per se, it’s the single most important habit to adopt if you want to be a successful trader.
Start by asking yourself three questions:
1. Why am I making this trade/investment? What is the trigger, catalyst, or motivation?
Perhaps you have reasons to believe that Bitcoin is undervalued and will appreciate considerably based on its growing utility as a global reserve currency. Or maybe you think Litecoin is going to 0 and want to profit from its demise. In either case, your investment thesis should be clearly articulated (and written down) in advance.
2. What will cause me to exit this trade/investment (this includes profit targets, stop losses, failed catalysts and changes to the environment)?
Setting clear goals will help you to capture profit when your thesis works out, and limit your losses if it moves against you. Having no defined exit strategy will force you to make decisions at exactly the moments when greed or fear may be clouding your judgment.
3. How am I going to enter and exit the trade?
You don’t have to buy or sell your entire position at once — you can buy and sell as your position either gains or loses value. As a general rule, you should be selling in small increments as prices increase and buying as they decline, all other things being equal. Remember to constantly recheck conditions against your investment thesis.
Once you have your plan, trade your plan. You can always refine and/or work on the next one, but avoid changing your rules while you have positions on (i.e. don’t change your plan such that you stick with a losing trade and pretend that your plan allowed for it).
Don’t be afraid to exit a position. If your trade idea isn’t panning out or if something changed that you didn’t account for in your plan, just get out. This is the easiest way to gain clarity and reassess. You can always jump back in later.
Stay tuned for Part II of our Trading Series where we will talk about Relative Value Trading Strategy.
For better understanding what it takes to be a successful trader, we talked to a professional trader David Vizsolyi. Read our full interview here.
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