Trading cryptocurrencies is a zero-sum game with clear winners and losers.
This competitive phase creates countless profitable, self-proclaimed dealers on Twitter and YouTube. How do their strategies compare to private retailers when big office players trade for institutions like Galaxy Digital and Pantera Capital? Do retail methods work at all?
“In general, the largest institutions are mostly directional agnostic and generally focus on market making.”Bill Herrmann, CEO of the Wilshire Phoenix investment firm, told Cointelegraph.
Herrmann means this with directional agnostic Institutions do not primarily act on a directional basis. Directional trading refers to the placement of trades on the long or short side and essentially relies on the market to rise or fall. In contrast, undirected trading strategies use various trading products, bots and other aspects to make money with the up or down movements of Bitcoin. Retail often takes a very different approach. These traders are usually alone to learn and succeed.
Most traders fail
Trading cryptocurrencies is similar to conventional trading in stocks, futures and currencies in several ways. Participants use price charts, indicators and basic drivers to justify the business and develop business strategies after hours of testing.
“Profitable day traders make up a small proportion of all traders: 1.6% in the average year,” says an article in Tradeciety that cites data from the book “Do day traders learn rationally about their skills”. “However, these day traders are very active: they account for 12% of the trading activity for the entire day.”
Nevertheless Trading is very difficult. In contrast to sport and other events, people trade or invest against the best professionals in the industry. A similar analogy shows an average person entering an NBA game straight from the street. The result would not end well for that person.
Trade has changed compared to the crowded town halls depicted in films
“When it comes to retailers, I think very few of them are really successful.”David Carman, a former pit trader on the Chicago Board Options Exchange and co-founder of the FinTank Technology Center, told Cointelegraph.
“Most floor traders were unable to successfully switch from pit to e-commerce,” said Carman. “With a few exceptions, everyone failed,” he added. “The advantage of trading in a pit was supported by the brokers. You lose this advantage if you trade electronically. “
Gone are the days when crowded trading areas housed participants who shouted for trades. Floor trading needed traders on the floor to enter and exit positions that were available to traders. Knowing the runner well was an advantage for the competition. When retail was digitized, this advantage disappeared.
The professionals equipped themselves against the self-taught masses
Institutional traders essentially place orders for other people or companies using the funds that these companies allocate to them. These traders monitor large amounts of capital and have the guidance, tools, and technology of the company they work for.. In addition, these companies often recruit battle-proven dealers with proven track records, or brilliant and talented individuals who have significant programming skills who are just entering the field.
On the other hand, there are retailers. This population consists of people with an internet connection, money to invest and a jurisdiction that allows it. The entry barrier for cryptocurrency trading is many times lower than for traditional market trading. Users can easily jump from one exchange to another and fund their efforts with cryptocurrencies or bank transfers.
These people are mostly people who want to make extra money for themselves.Control of his own capital. A wealth of trading tactics and knowledge is available online and in books to every motivated entrepreneur. Business classes are also online, but the web is confused with false information and self-proclaimed experts who sell information that may or may not be effective.
Even with the best information, personal adjustment is important when trading. What works for one person may not work for the next. It is a struggle of emotions, discipline and organization.
Institutes and dealers with substantial capital work differently
Institutional traders naturally have to act differently when dealing with large orders. You cannot simply buy a particular asset at the current market price without changing the price of that asset slightly.
Herrmann’s comments show that these retailers take a different approach than retailers who often bet that the market will go up or down. “Retailers tend to trade in a directional direction and generally implement popular strategies based on momentum, indicators such as the Relative Strength Index (RSI) and Stochastic.” Herrmann said, referring to the common technical analysis tools.
“This is a great way to get a quick overview of the market and can be very helpful to identify discrepancies. However, including these indicators on a chart, as many retailers do, is a mistake. Basically told everyone the same story. ”
Technical analysis indicators come in many shapes and sizes. There are different categories of indicators for measures such as volume, moment and time. As Herrmann mentioned, using several different indicators of the same type at the same time is less effective because all of them put together similar conclusions in slightly different ways.
Retailers who sell their methods
In many cases, retail includes a number of different indicators, patterns and charting techniques. These methods may or may not work depending on the purpose. Many paid educational groups, online classes, and YouTube videos teach these methods, but which one can you trust?
Each approach and tool varies by trader and generally only gives that trader a higher percentage of success in a particular trade, depending on the factors considered. Such tools are by no means a guarantee of success..
“The practice of selling indicators or even strategies has gotten out of control, as many websites make outrageous claims about how easy it is to trade, or some completely unrealistic, promising returns. There’s no magic technical indicator, but that doesn’t mean retailers can’t make money – it’s just hard work, but stick with it and develop your own lead. “
According to Herrmann Institutional traders do not use the same chart and indicator strategies as in the retail herd. He said the difference was “like day and night”.
Institutional players who work directly on behalf of the funds combine several factors, including the dynamics, price and volume of their business. Simply prioritizing a metric or tool is ineffective because the trader only gets part of the market situation. However, the combined use of indicators or market aspects leads to very different results. “It doesn’t matter whether you are institutional or retail. The result is extremely powerful analytical tools,” said Herrmann.
Retail can be effective
You can make money from retail, but it’s easier said than done. While not mentioning the same aspects as Herrman, CNBC Africa’s cryptocurrency analyst and Twitter personality BigCheds outlined some other important retail tactics.
“The key to successful cryptocurrency trading is risk management,” he told Cointelegraph. Risk management involves a predetermined plan that specifies the amount a trader can lose in a particular trade while keeping up with his chances of success for future trades.
Planning and discipline are two other keys to success, according to BigCheds. “Completing a deal on a plan, sticking to the plan, and sticking to your stop loss and profit-taking values,” said the analyst, are all profitable elements. “When an operation ends, it’s also a very important step to learn from experience from a trade journal.”
“Happiness also helps,” he added.
Public traders need discipline
Winning in trading requires discipline, said Matthew Ficke, director of market development at OKCoin. “Repeated success requires preparation. New traders can easily get excited about the market and make bad decisions as a result. ” He added:
“Experienced traders define a risk management strategy and parameters before entering into a trade. They study the market, find its “advantage” and use it repeatedly. Professionals create a structure for every single company. “
Ficke explained a simple example in which a person takes a long position at a planned level (buys an asset or a trading product). They then enter a stop-loss order and a profit-oriented sales order at predetermined levels so that trading can unfold. The operation reaches the goal or loses a certain amount of money, which is determined by the stop-loss or sell order.
Aside from a noticeable change in market conditions that could require a reassessment of trading, disciplined traders stick to their system and ultimately avoid distracting noise from the equation, Ficke said. Risk amounts also play a role. If traders risk less than they want to earn with each trade, this can leave more room for factored losses in one system.
“By using the structure, the dealer’s performance is more predictable and sustainable over time, while isolating the part of his process that requires improvement to increase returns,” Ficke said, adding:
“These principles are the same for traditional markets and cryptocurrency markets. Success takes time, effort, research and structure. Different personalities tend to be interested in different types of trading strategies. In this sense, the element of building an “advantage” of trading over time is personal and dynamic.“”
As the cryptocurrency generally continues on its widespread path, many newcomers can try their luck trading in this asset class. In order to succeed in most areas of life, hard work, discipline and learning, as well as a little natural ability or affinity are required. The trade doesn’t seem to be any different.