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Profit Protection Guide
It’s easy to make money in a bull market when everything is pumping. Bitcoin dips such as the one we have just experienced are powerful reminders of how the tides can turn. And just how quickly too. If you panic during a dip, you’re probably overexposed. Let’s recap on protecting your profits.
1️⃣Trade With a Plan
WHAT IS IT: the best way to limit the inevitable emotional reactions that come with trading is to develop a complete trading plan from entry to exit before you even open a position. That does not just include where you take profit but also where you accept that you are wrong and limit your downside: your stop-loss level. Doing this before you open a position ensures you are not susceptible to emotions such as fear and greed. Greed encourages you to not take out profit and fear encourages you to not cut a losing position because you are worried the price will bounce. Before you put money or skin in the game is when you can think most clearly and therefore when you should create your plan.
MYTH BUSTER: A splash of greed and a sprinkle of hope is not a trading plan.
GETTING STARTED: a trading journal can help you create a plan. Trading journals can be physical (on a notebook) or electronic (using programs such as Microsoft Excel or software packages like Edgewonk). We have a newsletter article to get you started: The Art of Building A Trading Journal. Once you have a trading plan, you can begin paper trading (trading without actual money) to test your strategy. Once it is tested and you are comfortable with it, you can decide to use real money.
LEVEL UP: The way to level up your trading plan for non-beginners is to start taking a macro overview of your various strategies and consider risk:reward and the highest probability plays. A great book to get started with this is Trade Your Way to Financial Freedom. For those who are more visually inclined, we have a Risk to Reward Ratio video guide.
2️⃣Use Stop-Loss Orders
WHAT IS IT: a limit or market order to close a position at loss. An order to limit the amount of money you can lose. This is the ultimate risk limiting tool. If you trade without a stop loss, you are exposed to virtually unlimited risk. You don’t even have to mentally frame a stop-loss placement as being “wrong”; you can also consider it as a means to mitigate randomness. For even if you can’t fathom the possibility of being wrong, random events are undeniable.
MYTH BUSTER: Liquidation is not a stop loss.
GETTING STARTED: simply place a stop-loss order on an exchange (once you have lost a certain amount, the exchange will execute and take you out of your position) or enter with a very small position size that you are willing to let go to zero. For more guidance on this, check out our YouTube video: Only Stop Loss Guide You’ll Ever Need.
3️⃣Leverage To A Minimum
WHAT IS IT: Leverage involves borrowing a certain amount of money needed to invest in something. In the case of crypto, money is usually borrowed from a broker. Leverage can be your friend: minimise your counterparty risk. By way of example, if your net worth is $100,000 you can keep $90,000 in cold storage and put $10,000 on an exchange with 10x leverage. Meaning your position size if $100,000. The problem arises when you use 10x leverage on your entire net worth of $100,000. Creating a $1,000,000 position and putting your entire net worth at risk. When it comes to position sizing, you should really only risk 1-2% of your portfolio on a trade. Patience is rewarded in the market. You can’t get rich quick by risking too much on a single trade.
MYTH BUSTER: Playing with leverage on shitcoins will not make you an overnight millionaire.
GETTING STARTED: There are a series of prerequisites before diving into leverage trading. Anything above 1x is not conservative and leverage works in both directions: increases your upside and downside on a given trade. A thorough understanding of technical analysis, system development, risk management and trading psychology are required in the first instance. For it is only with this knowledge that you’ll be able to identify trades with a higher probability of upside and lower probability of downside. Unless you have this insight, you don’t want to be applying leverage where your chances are 50/50. If you are convinced that you have this foundation, you can turn to our All in One Guide to Using Leverage.
4️⃣Stay on Top of the Market
WHAT IS IT: Make sure you have reliable sources of information to facilitate fundamental analysis. This won’t guarantee a winning trade but it will alert you to potentially disruptive circumstances that you can factor into your trading plan to limit overall risk.
MYTH BUSTER: Technical analysis alone won't allow you to see into the future.
GETTING STARTED: The approach we recommend for staying on top of trends is twofold.
The first component is to subscribe to a few newsletters and podcasts such as Market Meditations in order to stay up-to-date with the latest trends. We say a few because it’s essential to be able to filter the signal from the noise. For more on this check out Nate Silver’s book.
The next step is to engage with various crypto communities. Follow whichever accounts you like on Twitter, Telegram, Discord and interact with people.
Outside of trends and narratives, we can look to other tools such as on-chain analytics. On-chain analysis is a fundamentals driven approach rather than based on hype, sentiment or technical analysis. This type of analysis can be focused exclusively on one crypto-asset by looking at historical trends or can be used to compare different crypto-assets to identify undervalued/overvalued coins. One of our favourite platforms or this is nansen.ai.
5️⃣Take Profit Regularly
WHAT IS IT: countless people had life changing money in 2017 but they failed to follow this step. It is essential to take profit regularly. For as long as your profit isn’t claimed, it is unrealized profit. And unrealized profit is not yet real. It is subject to volatility and you can’t use it yet. Remember why you are trading, it’s not just about the money but what you can do with it.
MYTH BUSTER: Keeping money is better than making money.
GETTING STARTED: If you’ve made some money in the market, make periodic withdrawals from your trading account. If you don’t like the idea of taking that money out into fiat, you can explore various ways to earn passive income on stablecoins. For this, we have a full passive income guide. Stablecoin yields are extremely high at the moment and provide a fantastic opportunity to reduce your exposure to crypto assets whilst gaining returns of about 10%. FTX and Crypto.com are our preferred platforms for this. In a recent podcast, Trader SZ explained that his preferred method to take profit is to identify ways to get back into the position. He identifies re-entry points through pullback or breakout scenarios.
That brings us to the end of the guide on protecting your profits. Mistakes are only bad if we don’t learn from them. If the most recent market dip caused you to panic, make sure you are comfortable with the 5 topics covered today.
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MARKET NEWS & ANALYSIS
Bitcoin & Altcoin Flash Crash
Whilst crypto markets were bullish through the Coinbase Direct Listing, they plummeted early Sunday morning. Many have argued several potential catalysts for the move down, whether that is reports of an $8B Bitcoin sell order, increased United States regulation, or mining blackouts in China. What’s a fact, however, is that the crash wiped about $310 billion in less than 24 hours from crypto markets and led to over $10B in liquidations.
When too many people begin using leverage irresponsibly simultaneously, the market tends to correct in order to “wipe out” these leveraged positions before moving on higher. This is often what happens when a trade is crowded, a concept wherein a specific trade has too many participants thereby providing liquidity for whales who want to take the opposite side of the trade). Remember, markets look to cause maximum pain and liquidating big positions is a great example of this.
In fact, on Sunday alone there were over 1 million positions wiped from the order books. The single biggest position lost $68.73 Million. Sunday’s crash goes down in history as the second biggest daily liquidation event, only to be surpassed by the infamous March 2020 black swan event. As we mentioned in today’s main article, if you’re planning on using leverage make sure to use a stop loss above liquidation price.
NFT NEWS & ANALYSIS
Crypto-Rich Investors Snap Up Virtual Real Estate
Most people relate NFTs with art. However, art is but one part of a new economy of blockchain-based virtual worlds where land, buildings, avatars and even names can be bought and sold as NFTs. Decentraland is a popular example.
In these environments, referred to as the metaverse, people can wander around with their friends, visit virtual buildings and attend virtual events. Metraverse enthusiasts compare the rush to buy virtual land to the scramble for domain names in the early days of the internet. Their theory is that as more people congregate in these environments, plots of land in central locations will be highly sought after because of the amount of visitor traffic.
In what will be one of the biggest names to join the party, video game makers Atari told Reuters it planned to launch its own blockchain-based virtual world and would soon announce details.
On the one hand, investors argue online environments are going to be a big hit, regardless of fluctuations in the price of bitcoin. On the other hand, some caution that while big money is flowing into NFTs, the market could represent a price bubble, with the risk of major losses if the hype dies down.
Our stance on NFTs remains the same. They are an exciting and longer term play, for those passionate about the art/metaverse/game they are supporting. They are not a pure financial asset and for those with a more short term view, indirect exposure through fractionalisation is more appropriate. For more on this, check out our NFT Guide.
SCAN THE WEEK
On Mondays, our ‘Scan The Week’ section is designed to show our community what events and headlines we will be keeping an eye on.
Monday, 19th April
Live AMA with Chainlink 🎤
Tune in today to hear about blockchain gaming, open-world gaming, NFTs, and how Chainlink is used to distribute NFTs in a fair manner.
Tuesday, 20th April
MM Podcast Release #64 NFTs, Gaming and The Metaverse with Coin Artist 🎧
Coin Artist is the CEO of Blockade Games and has been involved in crypto since 2013.
Wednesday, 21st April
Chrysalis Migration 💻
This migration period that will allow users, exchanges and custodians to prepare their token migrations ahead of the network upgrade will begin 7 days prior to the network upgrade.
Thursday, 22nd April
Blockchain Life 2021 👥
The forum brings together over 4000 global industry leaders and beginners interested in blockchain and cryptocurrency. Hear from experts, network with employers in the space, and more.
MM Podcast #65 Earning High Yields through DeFi with Psykeeper 🎧
Psykeeper is the founder of DeFi protocol, Saffron Finance and has been building in the crypto space for the last 10 years.
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Disclaimer: The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. We are not financial advisors. Every investment and trading move involves risk. Do your own research when making a decision.