In the previous lessons, you learned the different steps of how to build a crypto trading strategy as a discretionary trader.
- How to use fundamental analysis, develop a directional bias (“bullish” or “bearish”), and generate potential trade ideas (go “long” or “short”).
- How to use technical analysis (TA) and price action (PA) to identify entry prices (“entries”) for your trade, as well as exit prices (“exits”) to take a profit or cut your loss.
- Three key concepts in trade and risk management to consider if you wish to survive as a trader.
- What a trading journal is and why you should journal your trades.
Let’s take all these separate pieces and see how they work as a whole.
I’m going to put it all together with a simple example of a crypto trade using our fictional cryptocurrency from an earlier lesson, Poopoocoin (PPC).
What’s the trade idea?
Let’s assume I did my research on the broad financial markets and economic environment and found that traders’ market sentiment is “risk on” since the global economy has started to grow again.
I also learned that large financial institutions are looking to put more capital to work in the crypto space, both in terms of investment and in the actual adoption of blockchain technology.Further research pointed me to PPC, which again, is the utility token for an up-and-coming blockchain network that claims to be “fast as sh*t!”
I learn that large institutions are looking to adopt PPC to be used for financial services.
The narrative on fundamentals suggests that PPC is a potentially attractive asset that could draw in buyers, which now makes be bullish on PPC.
Now that I’ve established my directional bias (“bullish”), I am now looking to buy or “go long” but what does the chart and price action analysis say?
Where is a good entry? How do I know if I’m wrong?
Below is a fictional chart of our fictional coin, Poopoocoin (PPC).
Based on price action, it looks like sentiment turned bearish after the coin hit a high around $90, falling back to the $40 handle.
I can also see that the $30 – $50 area was a consolidation range previously, which could draw in some buy orders if the market turned bullish on PPC.Of course, I also have to assume that if the market breaks below that area, then further downside could be ahead.
So, I’ve established a bullish fundamental bias, and based on price action, I’ve found a potential buy area and area of trade invalidation (a break below the $30 handle).
And with the $90 handle serving as resistance during the last bull run, I think that is a good area to exit some or all of the position for a profit. I now have enough to create a trade and risk management plan.
What’s the plan?
Let’s assume we have a fictional crypto account with a fictional $600 starting balance.
Based on our analysis, I think it will take 6 – 12 months for PPC to get back to the $90 level, so this type of longer-term trade is known as position trading.
I’ll risk a max of 5% of our crypto portfolio. At 5% of a $600 account, my max dollar risk should be no more than $30.
Since I’m not sure about where the price may bottom, I decided to “scale in” and set buy orders for 1 PPC at the $40 handle and 1 PPC at the $30 handle.
And I’ll set my chart-based stop loss at $20 because if the market gets down there, it’s pretty clear that the bears are still in control.
What is my maximum risk?
Now that we have the numbers, let’s do the math to see if my RISK is acceptable.
$600 account balance * 5% max risk = $30 max risk Buy limit order #1: Buy 1 unit of PPC at $40 with max stop loss at $20 = $20 max risk Buy limit order #2: Buy 1 unit of PPC at $30 with max stop loss at $20 = $10 max risk Total risk if both buy orders triggered = $30 (or 5% of our $600 account)
It looks like my max risk checks out, so now let’s look at my potential reward to see if the trade is worth taking.
What is my potential reward?
If both of my buy orders are triggered, I’ll have 2 long positions with an average entry price of $35:
1 token @ $40 + 1 unit of PPC @ $30 = $70 spend $70 spend / 2 units of PPC = $35
If I set my target to $90, the previous major resistance area, then my potential gain is $110:
$90 target - $35 average entry = $55 gain $55 gain x 2 units of PPC = a total gain of $110 (or an 18% increase on the account).
What is my potential reward-to-risk ratio (RRR)?
As a trader, it’s important to think in terms of “reward/risk”. Being able to make more on profitable trades than you lose on unprofitable trades is crucial to your survival.
My potential reward-to-risk ratio (RRR) is:
$110 total gain / $30 max risk = 3.67:1 R:R
Should I do the trade?
At over a 3:1 potential return-on-risk, coupled with a strong conviction that the fundamentals and positive market environment will draw in buyers, this trade is likely worth putting on right away rather than adding to my watchlist.
That’s a trade idea in a nutshell, and keep in mind, that this is a very simple example.In a real trade, you’ll also have to consider potential alternative market scenarios and unexpected changes to fundamentals.
You can even get more creative with the trade/risk management plan (e.g., rolling up stops, more buy orders at different position sizes, scaling out profits, etc.).
Overall, this should give you a clearer picture of how to put a discretionary trade together, and what should be going into a trade journal.
If you’d like more examples, you can check out our crypto articles on BabyPips.com! We publish newbie-friendly crypto watchlists there, and you can see how we “journal” our ideas.
We include fundamental analysis and catalysts to watch out for, and technical/price action analysis to identify price areas to watch for potential entry and exit points.
We’ve reached the end of my Beginner’s Guide to Crypto Trading and I hope that it’s given you some insights into the potential journey ahead.
If this doesn’t look like a journey for you, then that’s perfectly fine because crypto trading is definitely not for everyone.
But if you feel like this is what you want to do, you feel confident that this challenge can bring the best out of you, and that crypto trading would be the thing you’re best at, then go for it.
It’s those who are that passionate that have the best shot at finding success, no matter what the challenge may be.
Just remember that you do NOT need to risk big to generate wealth long-term in crypto!
Take it slow, internalize the core trading principles, practice the trading strategy discussed and use that passion to improve each day as a trader.
Starting small and taking it slow is a much better outcome than risking big and losing it ALL.