Crypto Strategies – Forex Academy

The unprecedented growth of the cryptocurrency market has created fortunes for a few “early adopters” who risked seed money on a new and relatively unknown technology before 2015. This has attracted interest from investors around the world, many with the intention of seeing three-figure returns in a matter of weeks.

In this article, we will never pretend to explain how to make you rich in a couple of months, and not why we don’t want it, but why it would be really it is not very prudent to invest in the world of cryptocurrencies with that premise. It is important to understand that investors who made fortunes were people who invested their capital in a temporary scenario where the perceived risk was really high, few people knew bitcoin, was associated with terrorism and arms trafficking, the future of these currencies was completely unknown…

A posteriori it is very easy to think that it should have been reversed, but those who made the decision at the time were not so clear and in many cases, the motivations were more socio-cultural than not economic. Not to mention the drops of up to 90% that they had to endure without selling to get the returns that now so amaze us.

As any investment has a very direct relationship between risk and return, now the risk is lower than in 2013 therefore the expected return is also. In any case, the current risk remains much higher than that of equity, for example, and for that reason can be a really interesting investment with a sound strategy and good risk management within the crypto market, so that we can opt for returns that we are not used to.

The idea is very simple, it finds the best value proposals, backed with the right resources, identifies good times of entry, and invests the right amount to not put at risk a large part of the portfolio.

Find the Best Value Proposals

We have to keep in mind that cryptocurrency projects use blockchain technology to cover a need in a different way. The first premise we will have to take into account is: does the project we plan to invest in really need the blockchain and the token to work? Could the same solution be offered without Blockchain? Does the need it seeks to cover really exist?

With these first questions, we can get an idea of if it really is an innovation and improvement or if on the other hand, it has wanted to put the Blockchain to the force in a system that did not need it.

From here it is necessary to assess a series of parameters that allow us to obtain an overview at the fundamental level of the project.

The main parameters would be:

Quality of whitepaper: This document is the DNA of the project, to distinguish the quality of the others it is necessary to read the whitepapers of projects that have already demonstrated their solidity and compare them with the new ones that we are inspecting. It is important to understand at a basic level the operation of the project and to be able to visualize its technical feasibility. It can be useful to rely on forums like bitcoin talk to better understand the project.

Team: It is a very important element, as in any startup the human team behind and their ability to overcome complex situations is what can make the difference between the failure or the success of the project. Interesting to see their “faces” on the web as this shows that they trust their work by putting their reputation on the line. It is also important that they have recognized “advisors” within the blockchain ecosystem to collaborate on the project.

Capitalization/#users 2: This metric is very interesting to keep in mind since most projects related to cryptocurrencies have the community effect, that is their value should increase proportionally to the square of the number of users. Values lower than the unit are ideal, although in many cases you see values that exceed one hundred or even one thousand, which would be an indicator to stay away from such criticism, showing a symptom of being overrated.

Limited units: It is essential that the founders do not have the capacity to create new units when they so wish.

Roadmap: All projects must have a well-structured and justified planning of the steps that will follow in the short, medium, and long term.

Github: This tool is a collaborative development platform. Most major projects have a thread on this platform and the developer community validates the quality of the code and makes new contributions to improve the project. We need to look at the size of this community.

We advise you to weigh these parameters according to their relative importance and obtain an overall score.

Finding a Good Time to Buy

Although I consider that a cryptocurrency must overcome the fundamental filter to be considered as a purchase option, it is not enough reason. The price has to confirm the purchase decision. Doesn’t make any sense, nor is it advisable, to invest in an apparent good project if your quote does not get out of a bearish trend, this fact could mean that the project is not as good as we think or that there may be some public or private information that we do not know.

We could understand price as a reflection or representation of the fundamental state of cryptocurrency in the medium and long term. So I don’t want to invest the capital in currencies that rise but do not have good foundations, nor in those that have them but fall. As you can see, I just want to invest in the ones that are fundamentally good and with their price rising.

To do this, after the fundamental analysis we must optimize the entry points, exit points, and the amount invested. Even if the best coins are filtered, without a good selection of entry and exit, or risk management, money is lost.

Let us briefly explain the basis of the strategy:

Looking at the chart with daily sails, from right (present) to left (past) we look for relative highs (MR) and relative lows (MR). An MR is the maximum point of a candle that is higher than the maximum of the previous three candles and at the same time exceeds the maximum of the next. An MR is formed when it meets the opposite condition, where the sail minimum is less than the minimum of the three previous and the next candles.

1) When we find an MR or MR we continue from right to left until we find in total two alternating maxima and minima, as shown in figure 1.

2) We will consider a possible purchase when MR and MR pairs follow an upward trend.

3) We place a Stop Purchase order just one satoshi above the MR, and the StopLoss (SL) just one satoshi below.

4) Each time the price creates a new MR and subsequently exceeds it, we will raise the SL just below the last MR.

5) We will keep the crypto in our wallet until the SL jumps. As you can see, we never limit profits by selling to the market or with Take Profits, but we let the price rise freely. On the other hand, losses are always cut at once. If we adjust the SL regularly when a change of trend appears, our tokens will be sold quickly and so we can invest the money in another cryptocurrency that has better prospects.

Risk Management

Everyone should know their risk aversion profile and should decide the proportion of the portfolio they want to risk per trade. As a general rule, I think it is optimal to risk 2% of the capital per operation, starting with 4 operations (8% total portfolio risk) and opening a new position once we have increased the SL from a previous operation above its purchase price.

In this way, exponential returns with limited risk may be eligible.

Diversification in a portfolio of cryptocurrencies is complicated as these are assets that belong to the same market. In any case, we should try to diversify at least taking into account the following two points:

– Market Cap: investing in large, medium, and small

– Typology: crypts that have currency functions (BTC, LTC, XMR…), blockchain infrastructure (ETH, NEO, NEM), and DAPPs (GNT, GNO, SC..)

The short answer to this question is yes, absolutely, however, you will need to adapt for it to be so. Let’s dive into how.

① Common Ground

Did I make money whenever I had the chance?

This is your number one question that you would ask no matter the market. When you derive some strategies from the stock/forex market, you do want to see tangible results.

Crypto is unique but there are also some universalities.

You need a plan because we cannot just flip a coin and decide what to do next. We need a clear idea of how we are going to approach and exit the market so that we can correct any mistakes.

→ Solution: When you come up with a plan, you must stick to it. Also, check your totals and see if your overall percentage of trades puts you in the winning or losing group.

② Community

Forex and stock community spirit tends to be quite strong. The same is true for the crypto people. Especially since it is a relatively new market, many individuals want to take the opportunity and give their projections of the future. Unfortunately, as most of these forecasts are incorrect, the only thing traders get is a false sense of support. What is more, these posts and announcements often create a major hype, causing many crypto traders to forsake common sense and their judgment even when things start to turn sour.

→ Solution: Let go of groupthink and start practicing independence and individuality.

③ Testing

You do not want to follow any advice too piously, especially if it proves not to work for you.

How will you know what works? You will test every strategy and idea you find interesting.

Most successful traders had to hit rock bottom to realize what they can do better. Still, you can avoid this scenario if you take time to record your trades and ponder on the ways to make your returns higher.

→ Solution: Like in the forex/stock market, you need tests to be able to improve and learn from your mistakes.

④ Money & Risk Management

Money management is key for long-term success. Without it, we are all just playing the lottery.

Crypto is amazing because, once you limit your downside, the upside can be infinite.

→ Solution: Set your risk at 5% maximum of your entire portfolio.

⑤ Algorithm

Traders claim to have successfully used the same algorithm they applied in forex trading for trading crypto. Still, you can trade cryptocurrencies without an algorithm. What you cannot do, however, is avoid money management.

Crypto is known to move 25% to the positive and then 25% to the negative in only one week (late and early 2020 rallies for example). As the moves can be quite extreme, you need the protection that money management brings.

→ Solution: While you need to be active to catch the big moves, do not forget that you will lose everything without proper money management. Algorithms are optional.

⑥ Scaling out

If you want to earn smart money, you will apply the scaling out strategy. You never want to go all in.

→ Solution: Take a portion of your money off and close positions. Overleveraging can lead to terrible losses in a market that moves as much as this one.

⑦ Holding & Holding

You want to play both offense and defense. Choose your long-term and short-term investment plans to fully use what the crypto market has to offer. Remember that the possibilities are infinite with proper money and risk management.

We noticed how some stocks that generally do not do so well can go up substantially when the S&P 500 does. Similarly, altcoins are known to go up when bitcoin does, and this usually happens at a much higher rate. That is why it’s wise to allocate a small portion of your money (less than 1/5) and invest in these other coins.

→ Solution: Set 30% of your finances for short-term (more aggressive) investments and use the remaining 70% for your long-term strategy.

⑧ Spread out

Like in other markets, you will benefit from branching out. What this means is that you do not need to trade only one cryptocurrency. Rather spread out to ensure a higher return.

For example, you can have the majority of investment in stablecoins as a protection in case everything else falls apart. Your second layer of protection could be bitcoin or XRP or, preferably, both. Then, 5-20% could go into different altcoins. As there are different ideas on which are the best, you can just take your favorites and invest a little of your money there as well. Your final layer should be your longshots or the coins you use for your long-term strategy.

You can always use interesting investing research portals such as stransberryinvestor.com. There is solid research done on crypto and stocks and a very good benchmarking tool that grades crypto assets. These are based on core evaluations on each coin, useful to gauge the market in-depth, underneath the charts. The picture below is a snapshot of the benchmark table. These are free resources but you will have to register your account. Note that you should understand the project behind the coin.

→ Solution: Trade different coins to ensure maximum growth, profitability, and protection.

⑨ Entry

There is no one ideal piece of advice on where you should enter the market. As with forex and stocks, we can rely on different tools to find entry signals. For trading cryptocurrencies, you can always use “Trailing Buy” and even accommodate it depending on how the price moves.

In the image above, the price went low and there is a chance of it going even lower, so we want to move the red line further down.

If the price moves up, we are not going to make any changes in terms of the position of the red line.

→ Solution: To get the signal to enter the trade, move the trailing line down only if the price goes lower than it is right now (i.e. if it breaks down upon the candle close). When the price finally hits the trailing stop, that is your sign to buy.

⑩ Exit

You need to have a defined exit strategy for any outcome- whether a trade has gone well or bad.

Like in any other market, you need to align your exit point with your overall strategy and be consistent with what you do. We cannot make any changes in the middle of a trade.

Your exit strategy may vary depending on the type of trade. As cryptocurrencies are great for holding, your exit will then largely depend on your idea of how long that trade should last.

→ Solution: Always have a projection of how far you want to go and where you want to take your money off. Be disciplined to ensure you know that your approach is working out for you.

⑪ Psychology

Since many are affected by the craze over cryptocurrencies, you may experience the fear of mission our (FOMO). The rules regarding trading psychology are all the same, regardless of whether you are trading stocks or currencies. This means that any strategy you want to use cannot be perfected until you have control of what you are doing.

→ Solution: Complete a personality test and see how your traits might interfere with your plans for growth in this market.

⑫ Similarities and Differences

Fiat may as well one day be completely replaced by crypto. Still, until that time comes, we must know that crypto largely depends on supply and demand – like stocks and unlike forex.

That is why any strategy we wish to take from these two markets requires testing to see if it is going to help or hinder trading cryptocurrencies.

→ Solution: Although forex/stock strategies can generally work with crypto, we need to be careful with our choices.