Crypto Trading and 3 Ways to Improve It For You
Trading is about outperforming other traders. Therefore, we should always look for new ways to gain more insights into markets to outsmart other traders. In the end, trading is some luck-game for which we can gain deeper insights and detect patterns.
If we can gain higher-quality insights from today’s markets, you’ll likely win more trades. This article discusses three essential rules to improve your trading.
- Define a trading process (we provide a three-step process to implement)
- Avoid overtrading or emotional trading
- Evaluate technical indicators
First, let’s learn about the importance of defining a process to achieve more consistent results.
Rule 1: Define a Process
What’s the first thing you do in the morning when you wake up? Perhaps we check our portfolio’s balance, we read some pending news updates, or we drink a coffee and don’t worry yet about today’s day of trading?
As with many things in life, a defined process delivers more consistent results. Perhaps you wake up every day without a plan or process. We have no idea how to generate new trading ideas or even use that day’s time.
In business terms, they define a process as a collection of related, structured activities or tasks that produce a specific service or product (serve a particular goal) for a particular customer or customers.
A process helps you to achieve more consistent results, improve efficiency, and reduces errors. In trading, a process contains a list of tasks that serve to make better investment decisions.
For example, for a news-based trader, a simple process could include the following tasks.
- Read 24h news on popular crypto publications
- Check out the Week in Ethereum newsletter to check if there are any project releases or updates planned
- Evaluate if the current news provides any trading opportunities
- Execute your trading ideas
- Monitor current trading ideas
However, let’s explore a more structured approach that includes all trading facets.
An Introduction to the Three-Step Trading Process
Here are the individual steps that form the three-step trading process.
- Crypto Trading Preparation
- Trade Execution
- Trading Reflection
Let’s explore each step in detail and discuss what’s involved. First, how to prepare for crypto trading?
Crypto trading preparation
The first step of our trading process assists us in generating new trading ideas. Trading preparation involves many tasks, while some traders only look at technical analysis or project updates to create new trading ideas.
Trading preparation includes much more. We start by identifying market opportunities by reading the news or taking a look at technical analysis. However, this shouldn’t be your main deciding factor to open a trade.
Next, we can include observation time to see how the market has reacted today or this week to specific events and if we can expect a similar reaction. For example, a popular project has released an exciting update, which increased the project’s token price. It’s your task to read up about this update, estimate the update’s impact, and compare this with the expected impact of today’s project’s update.
As you can read, trading preparation includes quite a bit of research. Understanding technical blockchain terms as a trader will prove to be very helpful in estimating the impact of the project’s updates. Take your time to learn about a project’s protocol or mechanism to identify opportunities.
→ Recommended reading: An overview of the best cryptocurrency trading education resources
Lastly, this step includes testing trading ideas. Backtesting is a popular technique to verify trading ideas. As per Investopedia, “Backtesting assesses the viability of a trading strategy by discovering how it would play out using historical data.”
It’s evident that this step focuses on opening a trade and managing your position. Therefore, it includes risk management, trade sizing, determining an entry and exit strategy, setting a stop-loss and take-profit target, or monitoring the news to adjust your trading position further.
Let’s say we opened a trade for a project update that will positively impact the token’s price. By closely monitoring crypto news, we notice that many publications are positively reporting about the project’s release. Therefore, we identify an opportunity to increase our trading size and perhaps adjust our take-profit level to a higher position.
Here, we want to reflect upon our trades. Ask yourself the following questions:
- What went wrong?
- What went right?
- What lessons can we draw from our mistakes or successes?
To tie this back to the trade execution step, we’ve just opened a trade for an exciting project update. By monitoring crypto news outlets, we notice that the update has been successfully implemented and received positively. Therefore, we could increase our trading size and adjust our risk-reward ratio.
We can draw a good lesson from this trading scenario to monitor crypto news one hour before and three hours after the planned project update. Actively monitoring news allows us to adjust our trading position more accurately.
We might also find that we want to use an automated tool that scans popular crypto news outlets for updates about a particular project. Monitoring crypto news manually for hours is a time-consuming task.
Now, let’s dive into the second rule to improve your trading.
Rule 2: Avoid Overtrading
Many traders make the mistake of feeling pressured to trade. Especially day or swing traders fall into this category. They feel they should make multiple small trades per day to continue to grow their balance.
However, there’s a thin line between trading and overtrading. Sometimes, we have to accept a quiet market. An asset's price may be stuck between resistance levels, staying there for weeks, making it hard for some traders to open new trades.
As a rule of thumb, don’t try secondary trading ideas if no good trading opportunities arise. Use your time to work on portfolio management, risk management, reflection, or even education to become a more knowledgeable trader.
We can often correlate overtrading with trading addiction or emotional trading. A volatile market brings a lot of excitement. We can open multiple short-term trades that provide us with an influx of adrenaline. This adrenaline influx can prove to be dangerous for traders as emotions take over the rational mind. Often, emotional trading leads to a more significant number of trading mistakes.
Rule 3: Are We Using Too Many Technical Indicators?
This section discusses the pros and cons of technical indicators. They can be an excellent tool for determining market momentum or market trends. However, using too many technical indicators can also present an incorrect image about today’s markets.
First of all, let’s clarify the different types of technical indicators. We can roughly categorize all technical indicators into the following four categories:
- Trend indicators help us determine the current price trend by looking at historical pricing data.
- Momentum indicators help us determine the overall momentum for a cryptocurrency. It tells us if we can expect an upwards or downwards trend for a more extended period.
- Volume indicators tell us the current trading volume and reveal the trading interest in a particular cryptocurrency.
- Volatility indicators tell us how quickly the price is moving and how big the price movements are.
To get back to our initial question of using too many technical indicators, yes, we can use too many. However, a lack of understanding of technical indicators creates the basis for most mistakes. To get a good analysis of the current market, try combining different types of indicators.
Some traders use three different trend indicators, which tell you more or less the same information about the market’s trend. In some cases, they might provide you with contradicting information.
In conclusion, pick a variety of trading indicators. On top of that, three to five technical indicators can provide you with sufficient information to make more accurate trading decisions. We don't want to use more indicators as the abundance of information makes it harder to conclude trading ideas.
→ Recommended reading: What are crypto trading signals?
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