Hello, fellow traders, I am Awen.
I believe that friends who trade contracts must have heard a saying: analysis is spot-on, but execution is a complete mess. After trading for a while, one should realize that analysis and trading are two different things. Proper analysis work should be done before opening a position, but once you hold a position, various unexpected situations can influence your original judgment. This may be due to changes in the market's direction or rhythm, causing the market to move contrary to expectations or at a slower pace, which can be frustrating. It could also be that the market is moving as expected, but unexpected news or other traders’ comments have influenced your trading perspective. So how do we prevent these situations in practice or how to handle emergencies under unexpected events?
Trading practice is a lifelong course that every trader never exhausts. Therefore, in this brief sharing, I can only highlight a few very typical scenarios or aspects that new traders are most likely to get confused about.
One, Choosing Objectives
Choose the right coin and be a good person. As a leveraged trader, volatility can be amplified by leverage, and during the trading process, the primary consideration should not be volatility but certainty.
1.1 Leveraged trading should not choose the most volatile coins but should select assets that are easiest to grasp the patterns. Of course, these two do not conflict; if you can find a coin that is both volatile and easy to grasp, that would be the best.
For example, EOS. EOS is a cryptocurrency that retail traders love to trade because of its high volatility and substantial wealth effect. However, EOS is only good to trade during one-sided markets because of its strong trend; once it starts, it doesn’t look back. Most of the time, EOS is in an unpredictable state, and participating in trades when EOS is fluctuating irregularly will only result in both monetary and psychological losses.
1.2 Choose a coin based on market conditions and trading direction.
Go long on strong coins during an uptrend, and conversely, go short on the weakest coins during a downtrend.
For example, when the new quarter just began, the strongest upward trends were EOS and ETH, while the primary choices for buying on dips were these two coins. When going short during a downtrend, Bitcoin is the top choice. Even if the final result is that mainstream coins had larger declines than Bitcoin, only shorting or chasing Bitcoin can greatly avoid the risk of violent rebounds.
Two, Opening Positions
Most cryptocurrency traders are short-term traders, making it difficult to hold out for ideal closing points. Additionally, many are not proficient in position control and cannot rely on fluctuations to average down. Given this situation, for most traders, a good entry price is more important than anything else.
2.1 Wait
An old saying: wait a bit longer. According to current market conditions, good positions can often be found with some patience, while jumping in at market prices often leads to awkward positions. If you are trading short-term, even under today’s slow rhythm, a decent risk-reward short-term entry price will surely appear within 2-3 days. If you wait a bit longer, you will definitely make the safest and most comfortable money. Conversely, many people impatiently chase prices up and down; if the current market is slow and you enter at market prices, you will likely spend most of your time waiting to get out, affecting not only your mindset but also your life.
2.2 Abandon uncomfortable positions.
After opening a position, if the market does not progress smoothly, you can first sell it off and find another opportunity to re-enter. Some people have an emotional attachment to their positions, feeling that once they open, they must see it through to the end, constantly monitoring until they make a profit. This is a mistake for two reasons: first, having the expectation of guaranteed profit is incorrect; it’s impossible to make money 100% of the time. You must be prepared to stop loss or exit at break-even. Second, Bitcoin trades 24/7, but we cannot stay awake 24/7. Unlike traditional futures traders, cryptocurrency traders must learn to conserve their energy. If after opening a position, you are stuck in a rut for a long time without clear direction and lack the stamina to wait for a market breakout, then abandon the position and take a good rest.
2.3 Please think twice before placing orders with the mobile app.
The mobile apps of major exchanges are very convenient and the experience is quite smooth, but please think twice before placing orders with the app. Trading is a serious matter, and many traders make the mistake of glancing at the charts on the app and feeling that it's 'almost' time to trade. However, if you compare the charts from your computer and phone, you will find that the same chart presents different visual perceptions on screens of different sizes. Mobile charts are more likely to create the illusion that 'prices have risen too much' or 'prices have fallen enough', which can lead to opening positions at indecisive price points.
2.4 Do not follow the crowd to open positions.
Many people have encountered this situation where someone shouts orders in group chats. What is the reason for this? There are a few possibilities. First, this person may indeed have unique insights. Second, after opening a position, someone may feel nervous, excited, or anxious and needs to shout to rally others for 'courage'. Don’t find my words ridiculous; in reality, some people under great pressure will shout in an open space to relieve their emotions. The trading process is similar; some traders remain in a state of anxiety for a long time and use this way of 'shouting' to bolster their courage.
So when someone shouts an order, do not follow blindly but inquire about the logic and have your own judgment.
2.5 What to do if you have made a wrong decision
The above points can only be considered general principles; everyone understands them, but in special situations, one may still feel nervous or impulsively open a wrong position, only to realize afterward that emotions led to an irrational decision. If that's the case, don’t worry too much; just bear a little transaction fee and close the position first.
Those who can buy are students, while those who can sell are masters. Most of us can only be students throughout our lives, so let's constrain ourselves to be good students, being extremely cautious when opening positions and looking at our vision and luck when taking profits.
Three, Holding Positions
There are too many influencing factors during the holding process, and I won't elaborate on all of them, just highlight a few points that I think are the most important.
3.1 Use the 'take profit and stop loss' function instead of manual stop loss.
This is a lesson learned from countless traders' blood and tears: do not hold positions, do not test human nature. Many people like to monitor and stop loss; initially, they have an expected stop loss level, but once the market reaches that level, they hold on due to wishful thinking, unable to bear cutting losses. The best outcome is of course to hold and return to profit, but what’s the worst outcome? Naturally, the losses keep piling on, leading to multiple times the loss. Therefore, please use programs to replace manual interventions and constrain human nature.
3.2 Not losing is also making a profit.
Once you are in profit, take some off the table first to secure profits, and set the rest to breakeven stop loss. This is something I’ve always emphasized in my community.
The way of trading is to accumulate wealth little by little, with compound interest as king. If you stray from your cost, you must resolutely avoid turning back into a loss. If you have made a profit, be sure to take some off the table to prevent working for nothing. In summary: be bold when in profit, let the rest go at the original price.
Being able to correctly identify the trend to make a profit on a trade is a skill, but how much profit you ultimately make depends on luck. Therefore, I suggest taking the part of the reward that you earned through skill first, and the rest depends on whether the market is kind to you.
3.3 Less loss is also profit.
Capital accumulation is moving in the direction of increasing capital. Expanding profits is a direction for increasing capital, and reducing losses is also a direction for increasing capital.
This section is specifically to answer a question that new traders often ask: What should I do if I get stuck in a long/short position?
The scenarios of being 'stuck' in trades vary based on market conditions and opening price points, but I believe there is only one solution: market price stop loss or stop loss on rebounds/corrections. It doesn't matter where the rebound/correction goes, as long as you can minimize your losses, that means you are making a bit more profit.
Some people worry that after cutting losses, the price will rebound. If it does rebound, that is indeed the best scenario. However, if losses expand, the consequences are unbearable. Therefore, abandon wishful thinking and be strict with yourself.
3.4 Do not look at news while holding positions.
When you have a position, if your self-discipline is weak, do not deeply engage in group chats or scroll through Weibo, as shout orders from the group or various rumors can easily affect your current position. Holding a position is stressful for most people, and various external influences can easily lead to deviation from your original viewpoint. Not looking at news while holding positions can reduce many worries.
Four, Positioning
4.1 The larger the leverage, the smaller the stop loss.
I personally use a relatively high leverage, but correspondingly, the stop loss is very low.
For example, under the same capital, a stop loss of $200 with 5x leverage and a stop loss of $100 with 10x leverage will result in the same loss when the stop loss is triggered.
Leverage is not the devil; controlling the stop loss is key.
What are the most appropriate levels to set stop loss and take profit?
Regarding take profit and stop loss, I mentioned some when talking about position size. First, let's talk about stop loss. This depends on the specific size of the position. If the position is small, the stop loss can be set wider. When the position is large, the stop loss must be small, especially if your stop loss will lose more than 10% of your capital, you must reflect on whether this trade was wrong. Generally, we consider technical aspects when setting stop losses, such as stopping when breaking below support or above resistance. However, when the position is too large, you cannot just focus on technical aspects; you should also consider whether the single trade stop loss will lose too much capital. The point is, losing 30% of your capital is quite damaging, so I think stop loss is more focused on this. As for taking profit, it’s the same: be bold when in profit, let the rest go at the original price, and taking profit is always right; the remaining part depends on the market's response.
4.2 A single loss exceeding 30% of the overall position is a serious matter.
From my personal observation, a single loss exceeding 30% of total assets is quite serious, and immense efforts are needed to break even afterward. Therefore, when setting stop losses, ensure that a single loss does not exceed 10% of the total position.
If the position has reached 90% and is about to be liquidated, should you stop loss or let it explode?
The suggestion is to cut losses immediately. I often joke with others that once you cut losses, you can treat yourself to a nice meal. In fact, when faced with imminent liquidation, what we should consider is not the market situation but the subsequent psychological conditioning. Let me ask you this: if you were to be liquidated and your account had no money left, what would you do? Exit the market? Bow to reality and walk away like a hero, but most people won’t; instead, they will choose to deposit more money from outside, which is a big taboo in contracts. If you continuously deposit money and keep getting liquidated, I won't elaborate on the consequences; I'm sure you’ve heard of real-life examples. If you still have some positions left in the market, regardless of how much capital you have, you can plan the next steps. So the reason I suggest cutting losses when close to liquidation is not just to let you treat yourself to a meal, but to keep the flame alive and prevent you from urgently trying to fund your account from outside after another liquidation, as the consequences can be severe and are painful lessons.
4.3 Try to use simple interest operations within a certain capital range, rather than compound interest.
Simple interest operations mean that regardless of how much your capital increases, you open the same position as the last time. If you have a capital of 1000 contracts, initially opening a position of 3000 contracts is fine. However, when you have 2000 contracts, it’s best to also open 3000 contracts, rather than using compound interest.
Why is that? Assume that the profit-loss ratio for each trade is fixed. With simple interest operations, as long as you ensure that your correct trades outnumber the incorrect ones, you can make money. However, in the case of compound interest, being right ten times but wrong once could lead to losing everything.
Therefore, my suggestion is to use the same position size within a certain capital range, and only increase the position size when the capital grows significantly.
Five, Psychological Conditioning
If the previous points are general principles, then this point is definitely the most practical takeaway from this sharing.
Contract trading emphasizes trends over prices. What does this mean? It means focusing on trends and not forming strong memories of the current price to avoid being unable to pivot when a trend arrives.
This involves a term: price anchoring. Price anchoring refers to how past prices influence our judgment of the current price.
For example, in the first half of this year, many people who went short were liquidated as prices rose. Because Bitcoin hovered around $3000-$4000 at the end of 2018 for a long time, people developed a memory of that price. When Bitcoin rose to $5000-$6000, some people couldn't accept the current price, thinking Bitcoin was 'expensive', so they went short. Similarly, after the decline from about $14000 in the second half of the year, countless people bought the dip near $10000, as this price was considered 'cheap' compared to $14000.
Retail investors make many mistakes due to price anchoring, such as being 'afraid of heights' during an uptrend and unwilling to chase prices, or even countering by going short, and repeatedly buying the dip during a downtrend.
Market makers also use this anchoring psychology to offload, such as last year's EOS violently rising to over $20, keeping the market's memory at $20, and then falling all the way down, making people feel the price is 'cheap' to buy the dip. Eventually, all the inventory was sold off between $15 and $20.
Returning to the phrase 'emphasize trends over prices'. Compared to price, we should value trends more. When a trend changes, we need to clear our minds promptly and follow the trend. For example, many people were trying to buy the dip around $10,000. There’s nothing wrong from a trading perspective; the risk-reward ratio is reasonable. However, if it falls below $9,000, one must accept that reality and take advantage of rebounds to go short. Conversely, if a strong upward movement occurs at this position, breaking through key levels, one should consider turning to embrace the bullish trend.
Clear your mind at all times, eliminate price memory, and be a calm observer to embrace the trend when it arrives; otherwise, you may end up retaliating by going long or short.
