Time is Important
Simply put, you need to invest time in cryptocurrency trading. The more you analyse, read, learn and trade, the sharper your skills will become.
You need to allow time to research before making a decision, and the demands on your life may dictate what sort of trader or investor you become. If you have a full-time job, family and active social life, be honest with yourself – do you have the time to do the necessary research and monitor your trades?
In cryptocurrency, the volatility of markets can mean you are under constant pressure and need to dedicate huge amounts of time.
The simple rule when it comes to decide how much to trade is ‘how much can you afford to lose’.
Before you decide how much to allocate, consider these rules:
- Never invest money you can’t afford to lose
- Don’t invest using a credit card or debt
- Don’t rely on unqualified trading advice
- Commit only a small proportion of your discretionary income
- Be prepared to see your investment decline
- Have an idea of what you are trying to achieve
Discretionary Income is the money you have left over after income tax and essential living expenses are covered. It is money you might choose to invest or save.
There’s no rule on how to allocate this money, but common sense dictates the risk should be spread, with the largest proportion in the least risky area, such as savings. The smallest proportion should be allocated to the most-risky venture.
There is, of course, volatility and risk in cryptocurrency, so take that in account when considering the allocation of your discretionary income.
It seems obvious, but have you asked why you are trading? No, to make money isn’t a good enough answer. Think about it; there are other ways to use your money to make a return, so there needs to be justification for the comparative risk of cryptocurrency trading.
When you have conducted your research, you may conclude that crypto can be considered a sounder investment than some fiat currency savings accounts. That means comparing cryptocurrency trading against non-fiat opportunities ranging from precious metals to property. Often, there is less risk here than in crypto.
After all this, you may conclude that crypto is the best place for your discretionary income with the risks measured and the potential rewards considered. This will help you to quantify your ambition.
Cost Averaging simply refers to making equal, regularly recurring trades, instead of a lump sum.
Some enjoy that cost averaging can mitigate concerns about volatility and choosing an entry point, as regular trades over time will smooth the ups and downs. Fundamental Analysis is important to help you make a judgement about the long-term viability of your chosen cryptocurrency asset. After that, your investment path is mapped out.
That said, cost Averaging works best when carried out over a period long enough to benefit from both a down cycle and an up cycle. And it is not risk free; over that time you will see the investment level fall, possible below what you initially put in, with on guarantee it will recover.
Thorough Fundamental Analysis will help you assess if you are prepared to take the risks associated with regular purchases, such as seeing your investment declining over an extended period.
Once your Cost Averaging routine is established and you are comfortable with how it works and keeping records, you can consider using technical indicators to adjust your regular investments.
The aim is to adjust down your allocation at times when the market is overbought, and vice versa.
There are plenty of indicators to help you with this, so do your research. Standard charting tools, like Moving Averages, Relative Strength Index (RSI) or Bollinger Bands, can be used and you might look to an external indicator to inform the adjustments which you feel correlate with price, such as the US Dollar Index (DXY).
You can use any model or indicator you choose, depending on what value you feel it has.
Lump Sum Hodling
When you start with Cost Averaging you may gradually move into trading-type decisions. There are drawbacks; it takes time to build a position, for example. You may instead choose to invest a lump sum rather than drip-feeding via Cost Averaging. Both require Fundamental Analysis. However, given the increased exposure you have with a lump sum, please ensure you have done your research on top of following the normal golden rules.
Fundamental Analysis becomes even more relevant if you are committing a significant amount of savings. If you are happy with the decision to go with a passive long-term investment, following Fundamental Analysis, you still have to decide price entry point.
Technical Analysis can be used to decide an optimal point to make the lump sum purchase - using Technical Indicators as described above. Then you get to sit back and hope your Fundamental Analysis is accurate!