My 11 Groundrules for Trading

Photo by Giammarco Boscaro on Unsplash

In the last year I've started to create some rules.
Some of them I've heard others say, others I've come up with myself.

Rule #1 - Use the Rules.
There is no point to having rules if I don't use them. Many times I've ignored a rule when I got into a trade and 9 out of 10 times I've regretted it.

Rule #2 - Protect the Capital, Don’t Protect the Trade.
The trade setup looks wonderful. I get into the trade and I see the price rising. All is bueno. Then it slows down. It starts falling. It's nearing my entry point again and all is not bueno anymore. The trade may still look good and I may still think that it will rise, but in order to protect my capital, I get out at break even.

Rule #3 - Have a Maximum Risk per Trade of 2% of My Capital Invested into Crypto.
If I start with $10,000 and I lose 100 trades of 2%, I will still have $10,000 x (0.98^100) = $1326.20 left.
This basically means that as long as my risk to reward ratio is more than 1:1 and I win at least 50% of the time, I will make profit in the long run.

If my risk per trade was 10% I'd be left with $1215 after 20 trades already.
The reason I chose 2% is because it's the most I feel comfortable losing in a trade right now and because I can be wrong lots of times without it being a big problem for my account.

Rule #4 - Don't buy/sell at the break of a structure, but wait for a flag.

Let's say there is an upward trend. Sooner or later there will be a correction. Look at the cryptocurrency markets in the last couple of weeks. We're in a big correction right now after we had an impulse in which a couple of coins doubled or even tripled in value.

After the correction the trend often continues (although it's also possible that it wasn't a correction but the start of a downtrend) and when it breaks out of the trendline it often breaks out in a sharp impulse. When is the correct time to enter a trade? What I've learned is to wait for a flag. A flag is a small consolidation, a small correction. The market makes them all the time as you can see in the chart above.

In general, a flag that goes down, will result in an impulse to the upside.
When a flag goes up, it will most probably result in an impulse to the downside.

Wait for a flag before entering a trade.

Rule #5 - Don't Go to Bed with Open Orders.
Crypto is 24/7. This has its benefits, but it means that we can't look at the charts at all times.
A lot can happen in 8 hours. Your stop limit order can get hit, the price can continue to rise and after an hour, fall, hard.
Then the next morning you tell yourself that if you were awake, you would have gotten out at X, but now it's too late and you've lost 15% of your capital.

Rule #6 - Look at the 4h & 45min chart.
Take a look at a 5min chart and a 45min chart of the same pair. On the 5min chart a lot happens in 4 hours. Lots of buy/sell setups and more volatility. When I take a look at those same 4 hours on the 45min chart, it's just a couple of bars. It's less volatile. The setups work better and more often.

I'm not saying that trading on a 5min chart is impossible, it's just not my thing. For my mental wellness and time management I choose the 4h & 45min charts.

Rule #7 - Place Trades with the 15min Chart
For the exact price at which I will set my stop limit order, I use the 15min chart.

Rule #8 - Look for at Least the .5 fib in a Big Correction.
Getting in too early can result in a loss, especially in a big correction. That's why I look for a correction to the .5 - .618 fib.

Rule #9 - Stay Out of the Trade Until There is Divergence on the MACD.

The MACD is the only indicator I use. As you can see in the chart above, I drew a line in the MACD. There was divergence in the chart at that moment. As you can see, the price of Bitcoin reached lower lows, but the MACD kept rising. Divergence in the chart can be interpreted as a sign of reversal. When the MACD rises while the price falls, it's more likely that the price will start to rise soon.

Rule #10 - Divergence on MACD isn't the Holy Grail.
It is true that often when there is a reversal, there was divergence, but not always when there is divergence, there is a reversal.

Rule #11 - Implosion Must Always Precede Explosion.
It's a natural law. Look at an explosion. A real life C4 explosing. An implosion always precedes the big boom.
Look at a chart. Doesn't matter which one. I can see a downward spike before a big upward impulse time and time again. Use it to your advantage.

Joël

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DISCLAIMER
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RISK STATEMENT
The trading of bitcoin or alternative cryptocurrencies has potential rewards, and it also has potential risks involved. Trading may not be suitable for all people. Anyone wishing to invest should seek his or her own independent financial or professional advice.
Cryptocurrency trading/investing involves substantial risk of loss and is not suitable for every investor. The valuation of cryptocurrencies may fluctuate, and, as a result, clients may lose more than their original investment.
All trading strategies are used at your own risk.