Cryptocurrency Trading System Born From Painful Lessons Learned


After trading cryptocurrencies for 16 months, losing and regaining everything two or three times, and coming out with 2.5x profits, I decided to write down the most important lessons learned so you can learn from my mistakes.

I under-performed the market in 2017. A crypto market that went up several hundred percent and having read 24 books on finance and trading throughout the process, these were my biggest takeaways. Remember, these are notes I wrote to myself, so they may not work for your trading style. This version was summarized exclusively for CryptoMarket360 – a full version is hyperlinked at the bottom.

1. Always buy the uptrend or trend reversal.

It is true that you should buy low and sell high, but since you don’t know when low is going to go even lower, wait for the price to consolidate or show signs of reversal, and then buy – this is low enough, with less risk than timing the absolute bottom.

2. If I can, I should try to buy when RSI shows “oversold”.

In combination with the first point, considering the RSI lagging indicator is a good idea to pick a buying spot – usually best when it says oversold, but also on the way up.

3. “Cut your losses early and let your winners run”.

Mathematically, to regain a 50% loss you need the price to rise 100% (double) so don’t let yourself get there. Psychologically, you force yourself to trade to make up for the losses, and under pressure, you won’t make the best decisions. Cut losses early and re-evaluate your reasons for the trade, go back in later on, at a lower price if needed. Don’t take profits early, wait for a drop – this is a good enough place to close the trade

4. Never buy after a huge spike.

I’ve almost never seen the price going up after a massive (typically a pump and dump) spike – usually, there is a short depressive period after it, so wait it out.

5. Never buy up the sell book of a small market cap asset hoping to start an uptrend.

I’ve seen this and it hasn’t worked out. People keep selling way below the newly pumped price.

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6. Avoid low volume assets.

When you urgently need the money, whether personal reasons or a better idea, liquidity is very important when selling off your position. Otherwise, the slippage will cause you to lose a lot more than you initially thought.

7. Never buy into or before sell walls that are bigger than 10% of the daily volume.

These typically indicate that the short-term price is going to bounce off and go lower. Wait it out and take advantage of it. Top exchanges like Binance will typically make the order book easily visible. Use it.

8. Average out at pull backs

Always make sure to pocket some profits after a good bull run. This allows you to handle risk better. You can let a portion of your position stay if you think we will continue to see higher lows.

9. There is no reason to buy highly correlated assets.

Simple enough right?

10. There is no reason to trade when I don’t have a great idea.

Cash shouldn’t burn money in your pocket, resist the temptation to overtrade. Only do so when you have a great idea and a high conviction.

11. The 10x returns might be over in cryptocurrency, therefore, it might not be a good idea to be all in on one asset.

The market is much more mature now and volatility is lower, 10x rarely happens anymore, so to gain more exposure to price surges, make sure you divide your investments between several vehicles.

12. Market leaders always have a bigger chance to perform over long periods. Might be a good idea to have at least 15-20% of my portfolio in a top 5 asset, preferably bought at a dip.

The top 5 assets in crypto always have a relatively better chance to perform well due to name recognition among other things.

13. [Stocks] The DOW/S&P500 supposedly move no more than 400 basis points per day.

This observation was made by a hedge fund manager several years ago. Nice tidbit of info to take into consideration when investing in other assets such as cryptocurrencies.

14. [Stocks] In bull markets, the day almost always closes higher than it opens. In bearish markets, the day almost always closes lower than it opened. When this is not the case for several days in a row, it might mean that a trend reversal has started.

This is another observation by the same hedge fund manager. Less applicable to intraday trading but worth considering.

15. Use mental stops rather than automatic stops, because automatic ones can get triggered by noise.

Your idea might still be right and the market might actually head into that direction, but if a single whale dumps for some reason unrelated to fundamentals, this is going to create noise that will take you out at a loss for no good reason.

16. Don’t use only technical analysis or only fundamental analysis.

Technical analysis doesn’t take into consideration big future events that fundamental analysis might be aware of. Fundamental analysis needs TA to better time and size a position.

17. If something has traded sideways since its inception, it is almost always poised to go up at some point

Based on my observations in crypto, every asset gets its turn to rise at some point, so ones that have been trading sideways forever, have a higher chance to go up at some point.

18. Always consider the macro trend and the industry/asset class state before buying an individual asset.

The particular asset might be looking good, but it is doomed if the market is going down hard, so don’t be picking nickels in front of a steamroller.

19. Check with my list of rules before entering a trade

It’s all nice and dandy to have a list of rules, but it’s of little use if you don’t put them to work.

20. [Options] Buy long-term put + call options with low implied volatility for something that expects a large move further down the road.

This is an asymmetrical trade with a calculated and known downside and potentially huge upside if you expect high volatility in either direction.

21. In crypto, due to high correlation lately, there are clear pure red days or sets of days. Buy market leaders then (safest choice), and sell them in the almost inevitable purely green days that follow.

I’ve seen this so many times. Another regulatory scare news comes out and the entire market plunges, everything is in the red – 5-20% per day, 1-2-3 days in a row. Then, on day 4, literally everything is green again – 5-25% up. Buying the leaders will decrease volatility during these times.

22. Always have at least 10% of my capital in cash, so that I can take advantage of great unpredicted event-driven trades that come my way.

There are always event-driven trades with great potential profits that come up, and there is money to be made for people who have the spare cash to buy during these times.

23. Don’t be afraid to go long in bubbles, but have an exit strategy.

The market’s ability to prolong the life of a bull trend and ignore common sense and bad news has always shown to be able to live even a little longer after the price has gone to even crazier levels. Bubbles don’t just pop to zero with the price going vertically down, so we will usually have enough time to react.

24. When the price goes ridiculously high, take profits.

When the chart goes virtually vertical, it is common sense that it could go down just as fast – it is the hardest time to sell, but a crucial point to take profits. The mental regret that follows missing such scenarios affects our psychology badly and is not a good state to be in.

25. [Stocks] [Value investing] To determine the strength of a company, use EBIT/EV rather than P/E

This is something I haven’t tried yet, but there’s a great explanation why it is a great idea, well researched backtested and proven in the markets by Joel Greenblatt. He’s had great success by using it in his systematic quantitative arbitrage fund, so it’s worth checking out.

26. A massive vertical plunge is always followed by a dead cat bounce

When Bitconnect was exposed as a 100% scam and was shut down, the price dropped vertically to almost zero. But then, it bounced back up by something like 15-30 percent, and it kept going up for a couple of days. This is caused, in my opinion, by the fact that bots and cavemen technical analysts, who never follow the news, look at the chart and think “this is a great time to buy”.

27. Buy market leaders and huge companies that are experiencing short-term adversity that has a low probability of affecting them long-term.

Weak hands sell. Price for a great company/asset goes down, I can buy then (if they’d become undervalued according to a discretionary type of analysis), and with time they could go up and return to old levels.

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28. Buy companies/assets that are going to benefit from a rather unpredicted or unknown major positive or negative event, right after it happens.

Something good or bad happens and largely affects the economy in a way that could make a company either suffer huge losses or make large gains.

29. [Stocks] Mutual funds are worse than popular indices (primarily because of fees). Popular indices underperform correctly weighted indices (i.e. RAFI FTSE performs better than S&P500).

The way indices such as S&P500 are structured, makes their price more comprised of overpriced stocks because of their higher relative and absolute price, and less comprised of undervalued stocks. There are indices where an emphasis is put on undervalued stocks, which will outperform the overvalued ones. Looks for these.

30. I should be able to change my opinion instantly and without hesitation. The bottom line is more important than feeling right.

If I held the opinion that an asset was going to go one way, but then made the research and it turned out that I started thinking it might actually be headed the other way, I should feel no obligation to hold on to my original opinion, just because I didnt want to feel I’ve been initially wrong. This seems obvious but is much tougher in practice for inexperienced investors.

31. My analysis is only good at the current date. At the current price.

What might seem undervalued today might already be fairly priced or overvalued the next day. I shouldn’t trade on past analysis, so as time passes, I should reanalyze and get up to date with the latest turns of events and opinions, charts, and numbers.

32. If I have the idea that something is going to go down but I am risk averse, instead of shorting (which is typically quite dangerous), I can implement the idea by going long an inversely correlated asset.

I got this idea from some guy in the “Hedge fund market wizards” book who was afraid to short the tech bubble, but went long bonds instead, which would go up when the bubble burst.

33. Don’t manage other people’s money and don’t be publicly accountable for returns in short time spans.

Managing other people’s money can be a huge mental burden and can tilt one’s trading strategies. Being publicly accountable for producing returns in short time spans, especially if those time spans are shorter than one’s longer timespan investment strategies, could negatively affect one’s ability to be patient.

Don’t alter your strategy because you are being pushed into providing returns in short time spans.

34. Don’t confine myself to only one asset class.

There’s a limited amount of opportunities in any given asset class. If I trade global macro style, I have an infinite array of possibilities, because there is always volatility and undervaluation in something, somewhere.

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