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Summary
- Bitcoin is unpredictable with its out of the blue moves; therefore, managing risk becomes an utmost priority while trading in this cryptocurrency.
- One should have a backtested strategy to trade Bitcoin before deploying their hard-earned money.
- Technical analysis may help in gauging the price behaviour.
Since Bitcoin kicked off its rally from US$11,000 all the way to US$42000, it has been on the radar of many traders and investors. On top of that, seeing big funds and billionaire investors getting their hands on Bitcoin might give the retail traders a feeling of being left out.
However, trading in cryptocurrencies is not similar to trading in other matured markets like the stock market or forex market. In short, trading in Bitcoin needs a cautious approach due to its 24-hour open market and extreme volatility.
Unlike other currencies, the price of Bitcoin does not change on government policies, economic outlook, inflation, interest rate etc. Being a highly speculative currency, demand and supply are the sole price determinants of Bitcoin, making it even more unpredictable. However, to get started on the path of trading Bitcoin, here are five tips that may come in handy while diving deep into this relatively new playing field.
1. Manage your risk
This is probably the most crucial step to follow while trading or investing in the financial markets. The market will always be unpredictable irrespective of the instrument or market chosen to trade. Bitcoin is even more unpredictable with its unexpected moves, making it imperative for a trader to manage the risk with utmost priority.
Managing risk may include having smaller position size, not opening too many positions at a time or not having a concentrated bet on one asset class etc.
Read More: Bitcoin goes haywire, tumbles over 30% from all-time high of $42,000
2. Avoid FOMO
FOMO stands for “Fear Of Missing Out”. This is one of the main reasons that traders fail to make consistent profit in a highly volatile asset like Bitcoin. This was the reason that led traders to buy Bitcoin in 2017, which eventually materialised in a gigantic rally.
While it may look like a good practice to chase the price as many traders made money in 2017. However, traders also got stuck at the very top of the 2017 rally for the next three years and witnessed more than 80 per cent drawdown due to the same reason. Therefore, one needs to be cautious while trading Bitcoin and avoid chasing the price.
3. Have a backtested strategy
Having a strategy which has not been backtested is as good as not having one. Backtesting a strategy reveals all the pitfalls and strengths of a particular strategy on the historical data. As Bitcoin is an epitome of volatility, some strategies which work well in more matured markets like the stock market might not work that way in the crypto space.
Therefore, one should have a backtested strategy to trade Bitcoin before deploying their hard-earned money.
4. Be fluent in Technical Analysis
There is a difference between investing and trading. For investing, one needs to learn fundamental analysis while trading calls for a good grasp over technical analysis. As Bitcoin is almost driven entirely by demand and supply without any intrinsic value, technical analysis comes in handy to gauge the price behaviour.
Technical analysis also helps manage the risk as individuals can plan where they would be exiting their position even before making an entry.
5. Stick to your niche
There are many ways to trade an asset class. For instance, one might prefer to go with a “trend following” technique while another may resort to the mean reversion form of trading. Both trading styles have their pros and cons, and it is up to the trader how good he is at his trading style.
Also, some traders may feel comfortable holding their position for a long time while others might want to square off positions in intraday due to the overnight risk of carrying the position to the next day.
These are just a few of the general guidelines that one can follow to finetune their Btcoin trading skills. One must also remember that trading in a volatile currency like Bitcoin requires a lot of experience and knowledge; therefore, it is always preferred to start small at the outset.
