Day Trading: How to avoid 4 of the most common mistakes! [Novice Guide]
Crypto trading is a complex matter with countless investment opportunities. However, success in day trading is not much different from trading with foreign exchange or stocks. You need to understand the basics of day trading and be up to date with the latest crypto news.
However, to achieve real results it is essential to know which mistakes you should avoid when day trading in order to be profitable in the long run. For this reason we have created this Day Trading Error Guide to help you avoid the 4 biggest mistakes in day trading in the future.
#1 Misunderstanding of the Risk-Rewards-Ratio
Ever heard of the risk/reward ratio?
Many mistakes are made when people act based on emotions, gut feeling, fake news and other advice. For this reason, you should be able to trade more systematically, understand (and evaluate) patterns, and have a neutral attitude towards your trades.
The term "Risk-Reward-Ratio" refers to the amount of risk compared to the profit for a particular trade.
The calculation is made as follows: You look at where you can make potential gains or losses. If a coin is worth 1€ and you sell with a loss at 0.90€ or a profit at 1.10€, this would be a 1:1 Risk-Reward ratio. However, if a coin is worth 1€ and you can sell it for 90 cents to 1.30€, the risk/reward ratio is 1:3.
As a crypto day trader, your goal is to see and exploit such setups. With a ratio of 1:3, a 25% win rate is enough to be profitable at the end of the day. Take a look at our graph, which shows the calculations in a very simple way:
WARNING: The risk/reward ratio alone is not sufficient to make systematic decisions. If you start with €6,000 and fall to €5,400 due to a lost trade, a 10% profit will not bring you back to break even . These odds apply on a trade-by-trade basis only; you will need to re-input your (new) starting value with each calculation to get accurate results: Your risk management strategy must take this fact into account!
Should you really act on the basis of risk reward ratios?
Most beginners start by using risk/reward ratios to determine your trade selection. This tactic is often a mistake because the risk/reward ratio does not tell you how good the trade really is.
The trick is to find trades that are supported by "technical analysis" to legitimize your calculated risk/reward ratio. Many beginners say: legitimize your trades solely on risk/reward ratios instead of considering the price of the coin, features, news, registrations, etc.
Many day traders search for Breakout and fall through points and open a position when violent price movements are possible. So it is natural that the reward side is high.
These trades have a minimal risk: your percentage loss will be much lower if the breakout/fallthrough fails. However, if you are right, the uptrend will be significant. However, your success will be determined by your trade calls as well as your risk management strategy.
#2 Trading with insane leverage
Poloniex was (for most day traders) the introduction to margin-based trading. The leverage increased only 2.5 times. The ability to make profitable day trades and swing trades was quite impressive back then.
However, the volume on Poloniex decreased. Many users have switched to Bitmex as they offer both "Trollbox" and leverage-based trading. The interface at Bitmex is very user and beginner friendly.
Check out our Bitmex Trading Guide to speed up your learning process.
On Bitmex you can trade Bitcoin with 100x leverage, which is much too high. The market only needs to move 1% to wipe out your position.
Many changes in the crypto world made higher leverage useless. The changes meant that "crypto whales" with more Exchanges had a way to "manipulate" the market. The big players could regularly pump or crash the price 1-3%, making it impossible to plan trades properly. Bitmex also charges 15% for market orders. This means that closing a lost trade would never make sense.
As prices fluctuated dramatically between exchanges, prices on Bitmex and spot prices were out of balance; if you sell a CFD on Bitmex at a price below the spot price on Bitmex, your position could even be liquidated by a smaller (0.25-0.5%) price movement.
Low leverage Info
Avoid high leverage until you have enough experience and control over your trades. The only way high leverage can be profitable in the long run is if you trade with a fraction of your money supply.
For most traders 2.5x is the safe "sweet spot". It is just enough to make considerable profits. This leverage is even useful if you want to trade small price movements.
5x is an adjusted leverage (with tight stops) if you trade near breakout points (or fall through points).
10x is a suitable leverage for breakout or crash moments that you can expect immediately after a message-based "catalyst
Place your bets on tight stops and use this trading function. Don't think you can time the market manually!
In fact, manually executing your stops is another mistake that many crypto day traders beginners make. As soon as the crypto price turns against you, your expectations of profitable trades change. You become more and more dependent on positive changes in price. It becomes exorbitantly harder to make a profitable day.
#3 Inability to understand risk management
Once you understand the technical analysis and the basic rules of trading, the next challenge is managing your seed capital. Once you tradebased on an efficient risk management strategy, your capital will experience much more stable growth.
Bitcoin-News.One recommends everyone to read our article "Risk Management Basics for Crypto Traders". This article will help you understand how successful traders manage their capital to protect against losses, maximize profits and secure their existing profits.
You can change your profitability level by varying the amount of your investment capital. Optimize the amount of money you use in a trade and your profitability will be higher in the long run!
#4 Trading based on irrationality.
A good example of this is the history of the Request Network (REQ). This coin had great expectations when it was in the ICO phase. In fact, the Coin raised almost 33 million dollars in the ICO phase.
Interestingly, everyone was waiting for the Mainnet release with the expectation of a bullish correction. The coin fell further and further into the Satoshi value, while the value of Bitcoin fell at the same time. In fact, the value of REQ did not rise much compared to Bitcoin after the low of €6,000 in February 2018.
Why did this happen?
Liquidity in REQ stagnated at the beginning of 2018 because the coin had many "Hodler" and hadfew day traders. The project was only considered "respectable" after the Mainnet release. Many hodlers who bought back in September 2017 looked for a way to sell the coin and continued their lost trade. Meanwhile many swingers and day traders bought into the hype of the Mainnet release before the event.
The bigger players took advantage of this and sold the rumor.
Why? Crypto whales didn't buy REQ based on a technical analysis. The sudden demand gave market makers the opportunity to exit without breaking the price too hard.
In June 2018 we see that the REQ was more than 75% below the highest price of 2018. The low of the coin was below 1,200 Satoshis after their PwC and Wikipedia partnerships, as well as Shopify plugin, while the high one month after their highly anticipated Mainnet release was more than 3,000 Satoshis. The price is below 10% of the all-time high, leaving many hodlers with no choice but to wait in the hope of a full recovery.
What can you learn from this?: The atmosphere at Altcoinmarkt has changed over time. What used to be a profit strategy is no longer effective. One cannot ignore an investment opportunity that seems "obvious", especially if it has been known for a while. Be careful which Altcoins you choose for day trading.
Day trading crypto is more difficult today than in previous years. The market has matured and there are far too many crypto currencies today. The leading stock exchange Binance alone houses more than 300 different old coins.
The market can no longer support day traders as well as it used to; with a larger selection of Altcoins to trade, it is important to know how to recognize "momentum" in a coin (and your community!) .
We have also noticed a change in the "functioning" of the market in recent years.
The massive bear trend after the crash of MtGox, which found strong support at 200 €, prevented most of the Altcoins from gaining momentum. Meanwhile, the trend reversal was a catalyst for an Altcoin bubble, where many cryptos increased 10-50x in only 1-2 years.
The accelerating pace of growth in the crypto world in 2017 has many eyes on Altcoin Day Trading. In the past, it used to be mainly the hard-boiled enthusiasts and hobbyists (some with a background in Forex, online poker, etc.) and the market was easier to handle. Now, between more traders, a currently collapsing BTC and too many Altcoins to trade, the trading mentality is a little different.
Hopefully our summary will give you a good overview of potential errors in day trading. Take the time to observe changes in the crypto-markets while you trade, so you learn when (and how) you can change your trading strategy.
Good luck with your trading!
Quick tip: "Opportunity costs" is another important term for learning. If you sell Coin A to invest in Coin B, and A rises 50% while B remains flat, your opportunity cost would be 50% of your trading capital.
In 2019, crypto-currencies have established themselves as tradable assets. The number of investors in the crypto sector at present is astonishing. Profitably volatile coins are still to be found for an Altcoin Day Trader. However, now more than ever you need to protect your capital - if not, you will go bust before you get big results!
We are in the middle of the age of crypto-currencies - and that's a great thing! This means that there are usually many day trading positions that can be identified based on technical analysis alone. Our article "Scalping 30 minutes trades - Day Trading Guide" will help you discover and exploit these profitable setups.