Even though trading as a whole, and cryptocurrency trading, in particular, is a potentially vastly profitable endeavor where one can make as much money in a month or a week as someone does in a year, most traders actually end up losing money instead of making consistent profits over an extended period of time. It's obvious even without any statistics because otherwise, everyone who is involved in retail cryptocurrency, stocks, or Forex trading would be driving that sacred "Lambo" and having a lavish lifestyle. But the harsh reality is that most people end up giving money away to the market rather than taking from it and building their net worth and improving their own and their families' living conditions.
But if we do refer to the stats, it would say that around 90% of traders are losing money, regardless of their intellectual prowess, educational background, or prior experience. In fact, there are a lot of highly intelligent people who fail to make it in the cryptocurrency market or any financial market for that matter. The said 90% is an approximate number, of course, which differs from industry to industry and depends on the market cycle - making money in the bull market is a lot easier than trying to stay profitable when bears take charge - as well as the current economic and geopolitical situation. But the numbers don't change the fact that the overwhelming majority of cryptocurrency traders can't make it in this game of probabilities.
According to eToro findings, the median loss of that 90% of traders amounts to 36.3% of their trading account. 75% of traders end up quitting in less than two years. This has always been the case in all financial markets, regardless of their type and maturity. For instance, in 1999, the North American Securities Administrators Association (NASAA), not to be confused with the U.S. government agency for aeronautics and space research, revealed that 70% of traders see nearly all the money in their trading accounts evaporate, while only a mere 12% of speculators make consistent profits on their short-term trades. The reason why current stats have climbed up to 90% is that trading, and especially cryptocurrency trading, became much more accessible to ordinary people through free mobile applications and exchange platforms that are being widely advertised. These people get lured into this super-tough industry by the promise of quick enrichment with little to no effort, only by following some "magic" strategy or heeding the recommendation of self-proclaimed trading gurus. But even those who grasped the basics of trading and got their skin in the game still end up giving away more money than they receive.
In this article, we will disclose and analyze the reasons why the overwhelming majority of traders suffer tremendous losses at some point in their careers or even blow their accounts to bits. It doesn't refer to short-term losses that all traders, without exception, encounter during bad streaks or unexpected market shifts, but losses that occur on a consistent basis even when the market conditions are favorable. We have divided these mistakes into three categories, namely:
- Bad education;
- Erroneous trading system and trading ethics;
- Weak trading psychology.
These three factors are what differentiates a winning cryptocurrency trader, who acquires consistent profits and improves his equity curve, from a losing trader, who might have a few substantial wins along the way, but will ultimately find him/herself sitting in the red. But remember that even the most prominent cryptocurrency traders, who got everything figured out, don't stay in that 10% of winners for the entire duration of their careers. The nature of the game dictates that practically everyone's performance vacillates between 90% and 10%, with the only difference being that profitable cryptocurrency traders never stay in the losing territory long enough for it to have a detrimental effect on their equity curve. So, if you want to be a successful cryptocurrency trader, heed what we have to say because it's a rundown of all crucial mistakes that both nascent and experienced traders make, and, as you probably know, it's better to learn from other people's mistakes.
An investment in knowledge pays the best interest
Like with every high-skilled profession, cryptocurrency trading requires a great deal of knowledge to be acquired before one can get down to trying to make profits from analyzing the galloping charts. But unlike most other jobs, no one will ask to present a diploma before allowing you to register an account and start competing with thousands of expert currency speculators across the world. The access barrier here is practically non-existent, meaning that anyone with a broadband connection can create an account on Binance or other popular cryptocurrency exchange platforms, deposit a certain sum of money, and start trading away. No need to spend four years in college learning the craft and then perhaps a year as an intern getting valuable experience - anyone can become a crypto trader, at least on paper, in just a few clicks.
However, pretty soon, everyone comes to realize that without proper education, trading is no different from gambling. But where does one get this invaluable knowledge? Basically, it boils down to either self-education, online or offline courses offered by some brokerage firm or individual traders, or finding a mentor who has already taken his lumps and knows what needs to be done in order to achieve success and is willing to share his or her expertise.
Interestingly enough, the overwhelming majority of losing cryptocurrency traders actually don’t seek out proper education. They sign up for some online course called something like “The best crypto trading strategy that guarantees 500% profits,” which usually teaches some basic application of support/resistance levels and indicators, learn the minimum basics and then immediately try to apply it to a live market. They might get lucky here and there, but the market will ultimately punish them for this ignorance, sometimes very badly. But instead of trying to dig deep into the reasons behind losing trades, such self-educators get frustrated and start claiming that the game is rigged and abandon it altogether.
Don’t get us wrong; we are not against self-education with regard to cryptocurrency trading. In fact, it might be the best way to go, along with getting a competent mentor, but what has to be understood is that it could be very tough, confusing, and even frustrating because, unlike math, physics, chemistry, or even literature, there are no definitive rules or laws in trading - every trader is entitled to his own opinion and is free to exercise any approach as long as it generates consistent profits. It could be the most counter-intuitive decision that will bring the money rain, while the “all done by the book” approach could lead to horrendous losses. In fact, there is an approach to cryptocurrency speculation called “trade the trader,” which implies that the market participant actually plays against the crowd that follows recommendations and observes the patterns from numerous trading-related books and courses. Actually, it makes sense because that crowd usually comprises that infamous 90% of losers who trade the classic pattern blindly, with practically no regard to what the overall market conditions are or what the big institutional players could be doing.
If you do decide to embark on the path of self-education, don’t ever rely on the numerous trading educators on YouTube or other online platforms which offer some basic information for free but are essentially advertising their books, courses, or whatever. It goes down to a simple logic: if those tutors - most of them are young individuals who have barely passed the legal drinking age - are so versatile in trading, they should be making ten-fold more money trading instead of devoting so much time and effort to filming and editing videos. You could use their content as a basic guideline from which you would seek information on your own accord, but don’t rely on them for proper education in cryptocurrency trading. Remember that most of the time, the things that are told by the self-proclaimed gurus are actually the reverse of what professional traders do. As always, books are the best source for self-education, and we compiled a short list of those that contain the most valuable knowledge.
- “Trade the Trader: Know Your Competition and Find Your Edge for Profitable Trading” by Quint Tatro.
- “The Disciplined Trader: Developing Winning Attitudes” by Mark Douglas.
- “Reminiscence of a Stock Operator” by Edwin Lefevre.
- “Japanese Candlestick Charting Techniques” by Steve Nison.
These should be the bedside books for every trader who aspires to become a professional in this particular field. However, it would help if you remembered that there are a few distinct differences between trading stocks, Forex, commodities, and other traditional assets and trading cryptocurrencies. First of all, the cryptocurrency market is immature, especially in comparison to that of stocks and Forex, which makes it much more volatile, irrational, unpredictable, and thus riskier. The traditional markets are reliant on real-world economic data like earnings reports and inflation rates or geopolitical events, while crypto is still mainly stewing in its own juices, at least until it acquires a mass adoption. Also, we noted that a lot of traditional chart patterns and setups don’t work in cryptocurrency markets due to their erratic and volatile nature. Therefore, you should take the information presented in the above-mentioned and other books on classical trading methods with a small grain of salt and always backtest the strategy that is based on traditional patterns before applying it to live crypto markets. The books below will help you find other distinctive differences between traditional and cryptocurrency trading and refine your strategy to perfection.
- “Cryptocurrency Trading: The Ultimate Guide” by Ryan Martinez.
- “Cryptocurrency Trading for Beginners” by Charles Swing and Masaru Nakamoto.
- “Bitcoin and Cryptocurrency Trading and Investing” by Andrew Montana.
You could also try different online trading courses, but you ought to know that if you just type in these words in a search engine, you will surely get the suggestions that are SEO-optimized by broker firms to lure more customers and profit on their losses, which constitutes an outright conflict of interest. To help you avoid falling into this trap, we have a separate section on our website devoted to Bitcoin and cryptocurrency courses that were picked by our team since they contain the most valuable information that will help you make it into the winning 10%.
To summarize, the lack of quality education in trading in general and cryptocurrency speculations, in particular, is one of the main reasons why traders lose money consistently. Knowledge is the foundation for any successful career, but in trading, there are a lot of peculiarities that have to be taken into account before the knowledge could be applied. Unlike many other professions, learning how to trade cryptocurrencies is a never-ending process, a constant learning curve, because of the ever-changing market conditions and new solutions that emerge every other year and add to the existing landscape, and if you fail to educate yourself, rest assured that you will eventually find yourself among sore losers who blame the market manipulators for every loss instead of trying to get to the root of the problem.
Weak strategy, poor position sizing, bad risk management - welcome to the 90% of losers
We can't stress enough the importance of having a well-elaborated trading strategy in place, which is key to successful cryptocurrency trading, while the absence of such strategy or its misuse is a straight path to that infamous 90% of traders that fail to make money in this business. There is a reason why the saying, "Plan your trade and trade your plan," has been a rule of thumb for generations of traders, including the young one that specializes in cryptocurrencies. There is also another one that goes, "If you fail to plan, you plan to fail," which is especially relevant to the topic at hand.
Trading without a strategy, or a plan, is like wandering in the mist of market noise, confused by the never-ending flow of news and data. Creating a well-defined cryptocurrency trading strategy requires a great deal of time, effort, and testing before it can be applied to a certain cryptocurrency market.
However, drawing out a trading strategy isn't enough to propel yourself to the golden 10% of winning traders. It's one thing to have it written down on a computer or even a piece of paper, but it's the whole other thing to be able to execute it to perfection without regard to your emotions, possible hype or FUD, and other distractions.
Developing a cryptocurrency trading strategy that suits one's trading and lifestyle requires a great deal of time and a lot of trials and tribulations. It would be best if you never use a raw strategy to trade with real money because that is a recipe for disaster. Instead, you ought to test it for an extended period of time on your paper trading account that is offered by some cryptocurrency exchanges or the one that can be created on the Tradingview platform by connecting the exchange of your preference via API.
It's of immense importance for the cryptocurrency trading strategy of your design to take all elements of money management into account because professional trading is more about efficient risk and money management than guessing where the price of this or that coin would go next. But remember, there is no crypto trading strategy that is 100% fail-proof - the market conditions are constantly changing, so a strategy that had proven to be efficient for the past six months, for instance, when the market was in the bullish phase, would become ineffective once the conditions turn bearish. Sticking to one strategy at all times is also a mistake that could cost you a place in that golden 10%. You need to adjust and adapt to different market environments not only mentally but also strategically. Be prepared to work on a set of different plans and strategies that can be applied to a wide variety of scenarios. If the market has shifted, but you haven't drawn out the guidelines for reacting to these perturbations, your account will definitely suffer.
After developing, testing, and implementing literally dozens of profitable cryptocurrency trading strategies, we have elaborated a set of rules and recommendations that you might want to follow when devising a trading strategy that would help you stay on the winning team.
Learn the fundamentals
Get a grasp of the blockchain technology and keep an eye on the news related to system upgrades, hard forks, and business partnerships. Fundamentals play an important role in cryptocurrency trading, and the price usually reacts to changes in this area. If you don't know, for instance, what effect Bitcoin halving has on its price or how the price of an altcoin might react to integration with a new protocol, you will have to do a lot of guesswork or miss out on profit-making opportunities that didn't reveal themselves on the chart prior to the actual move.
Relying solely on fundamentals is also not the best approach to cryptocurrency trading; it has more to do with investing and holding the underlying assets for a long period of time. We don't insist that trading crypto without the knowledge of fundamentals would result in the loss of money, but it's definitely a factor to be considered if you want to utilize more opportunities and remain consistently profitable.
Choose your trading style and time frame wisely
Determine your trading style and the time frame on which you intend to implement the strategy. It's essential to be aware of your capabilities with regard to how much time you can devote per day to screening and analyzing the charts. For example, if you combine trading with a regular nine-to-five job, there is practically no way for you to become a profitable cryptocurrency day trader, let alone a scalper, because these trading styles require the trader to be glued to the monitors for almost the entire duration of the day.
At the same time, day trading might not be fit for people who are prone to making impulsive decisions and generally lack patience because these traits might force you to buy breakouts and sell breakdowns, which occur very frequently on the volatile cryptocurrency markets, thus making a trader chase the price around instead of waiting for it to arrive at the desired level. In that case, the trader needs to take a step back, switch to a higher time frame, and alter his trading style and strategy.
Day trading on the cryptocurrency market could be very tough due to large price fluctuations, the direction of which is harder to predict than in other financial markets. In our experience, swing trading is the most common style used by successful cryptocurrency traders because it eliminates most of the noise and allows traders to put the situation in the proper perspective, but then again, it all depends on one's knowledge of the market, prior experience, and trading discipline. If you are a novice to the art of cryptocurrency trading, it would be better to develop your trading style on demo or paper trading accounts. Take your time, and don't rush to enter live markets. Remember that hastiness is the enemy of perfection, and in this case, the enemy of successful crypto trading. If you don't figure out the trading style correctly, you will never be able to find a place among the trading elite.
This brings us to the matter of picking the right time frame for trading, which is super important because even the most refined strategy won't work if applied to the wrong time frame. One of the main reasons why 90% of cryptocurrency traders lose money is the fatal desire to trade on smaller time frames since they presumably provide more opportunities for profit-making. This desire stems from greed, one of the two most destructive emotions that become an obstacle on the path to long-lasting success. Regardless of trading style, it's preferable to build the trading strategy on the foundation of the daily time frame that is the most suitable for spotting and following the macro trend. A lot of people ignore it and jump straight to the 4-hour or even the 1-hour time frame and try to determine the market structure there, thus making the first step to the losers' land.
Needless to say that the attempt to trade on a 1-minute time frame in a crypto market would be futile and destructive to the account, even for a relatively experienced trader, because of the market noise and its inherent volatility. All time frames up to 15-minute are suitable only for pinpointing the entry or the exit area near the important price levels that were determined on higher time frames. Even the experienced scalpers rarely go below the 15M time frame, which is a trigger one for them, and use the hourly one for trend determination. Day traders use 4H as a trend time frame, while 1H serves as a trigger time frame. Swing traders pick their entry and exit point on a 4H time frame and use the daily one to identify the trend direction. Lastly, positional traders, who are essentially holders, look for trends on the weekly time frame and make decisions on the basis of price action on the daily time frame. But during the active trading session, or when analyzing the market of your choosing, it is recommended to switch between multiple time frames in order to see a bigger picture and to understand the immediate price flow.
When size matters
The most common, and the most dire, mistake made by cryptocurrency traders of all levels has to do with position sizing. A trader could have the most appropriate trading strategy in place, but without the understanding of the mechanics of position sizing, the efforts to convert this strategy to steady profits would be to no avail.
Many believe that position sizing is what determines the 10% of winners from the 90% of losers, while there is no argument that it's a key element in risk management. Once again, if you don't exercise proper risk management on each one of your crypto trades, rest assured that you will blow up your account sooner rather than later; it's a simple yet unfailing axiom of cryptocurrency trading. Without position sizing and risk management, you are more of a gambler than a trader, the reckless one who might go all-in on a single bet. The failure to do that comes from greed, disorderliness, overconfidence, and lack of patience. While being blinded by the prospect of larger profits when one has everything on the line, compared to taking bite-size trades, one forgets that the potential losses are even greater because it requires larger price gains to recover a loss. For instance, after a 10% decline, the price would have to gain 11.1% for the losing trade to break even; the come-back road from a 25% loss would be 33.3%, and so on.
Taking managed losses is the part of the trading game - there is no need to be afraid of them; but if you take an unjustifiably large position, it becomes that much harder to climb up the recovery ladder, especially when considering the emotions that overwhelm the trader after he has suffered a considerable drawdown.
Oftentimes, a trader wants to recoup the losses as quickly as possible and places a big-sized order again, being mentally pressured by the thought of being a lesser speculator, which is another huge mistake on his part and a straight road to the damned 90%. At that moment, he tends to jump at the first seemingly good opportunity that comes his way, which is another sign of a gambler's mentality. It must be remembered that even the top-tier crypto traders make mistakes and enter bad traders that go the wrong way. But their approach to this situation is what separates a professional from an amateur. Upon suffering a significant loss, a pro trader does the opposite and dials down the position size, reassesses his strategy, and then takes his time to find the trade opportunity with the highest probability of success, even if it takes days.
Successful crypto trading is not about how quickly one can make a fortune, or at least a decent amount of money, but rather about the trader's ability to always be in the game and manage risks so that the losses never, or rarely, exceed the gains. If his approach to position sizing is reckless and opportunistic, he would never be able to make a living out of this profession.
Determining the position size in cryptocurrency trading is a bit different from "traditional" trading, mainly because the crypto markets are much more volatile than Forex or stocks. The golden rule of risk management is to risk no more than 2% of one's account size, which is another term for the available capital, on any given trade. It means that if one has an account size of $10,000 and is prepared to risk 2% of that sum, he can't afford to lose more than $200 on a single position. But for cryptocurrency trading, it's advised to reduce the risk to 1% on any given trade so that the risk won't exceed $100. The formula for determining the position size also takes into account the so-called invalidation point, which is the price level where the prediction gets invalidated. For instance, let's say that you are trading the breakout of a symmetrical triangle to the upside in the BTC/USDT pair and expect the price to go up by 10% or more. At the same time, you see that if the price goes down by 5% or more, the pattern, and thus your forecast, would be invalidated. The invalidation point is usually the place where a trader places the stop loss. To calculate the position size, you would need to use the following formula:
Position size = account size x account risk/invalidation point.
In that case, the position size would be $10,000 x 0.01/0.05 = $2000, meaning that you shouldn't devote more than $2000 to that particular trade. As you can see, everything is quite simple, but, remarkably, most crypto traders fail to do even that basic risk management drill, so no wonder that they are destined to fail.
A winning crypto trader can't afford to ignore the risk/reward ratio
If you are an active cryptocurrency trader, your mailbox must be littered with emails from "successful traders that made millions from the $1000 deposit," offering a strategy that has an over 90% win rate. Some of them are outright scammers, while others are legit but not overly successful traders, who want to make an extra buck by selling some simplistic strategy that might indeed have the said ratio, but there is a catch.
A great win ratio doesn't mean that the strategy generates substantial and consistent profits because even though one might have a number of winning trades, the losses incurred by losing ones, even if there is only a handful of them, could exceed the profits by a substantial margin. Statistically, it remains a killer strategy, but profit-wise it's garbage because the basic rules of estimating risk/reward are being ignored.
A quick reminder that the risk/reward ratio is the relation between the distance to your stop loss from the entry point and to the determined profit target. This ratio is central to the money management strategy of every crypto trader that records consistent profits and thus belongs to the golden 10%.
There is probably no need to expand on this particular topic because the basic rule here is not to take trades that aren't worth the squeeze; in other words, the trades with 1:1 or even 1:1.5 risk-to-reward ratio should be ignored. In traditional trading, 1:2 is the golden ratio, but given the inherent volatility of cryptocurrencies, that ratio can be upped to 1:3. That way, even if your win rate barely exceeds 50%, you would still remain on the profitable side because your winners would always be bigger than losers. The trick here is to look for trading opportunities where you don't have to place a tight stop loss; otherwise, you would be stopped out way too often, and your P&L would suffer.
Never underestimate the psychological factor
Like in every profession that involves a great deal of risk-taking, successful trading has a lot to do with the right psychology. This is a very broad topic, on which we might elaborate in one of the next articles devoted to cryptocurrency trading, but here we would like to specify the psychological traits inherent to the most prominent crypto traders.
- A successful trader turns off his ego and hope completely and is not embarrassed about being wrong, and doesn’t expect the market to meet his expectations, while the failure tend to hold to the losing trades and hope that the market would turn in his favor at any given minute;
- A winner is focused on his performance and the ways to improve it rather than market movement and the constant search of the “Moon” trade. His thinking process isn’t affected by emotions or desires to squeeze the profit from the market;
- A loser often lacks the patience to fish out the trading opportunity with the largest success probability and the best risk/reward ratio;
- 90% of cryptocurrency traders are psychologically incapable of adjusting to the shifting market conditions and maintain their composure during critical events.