Probably don’t use the rainbow chart to tell you if it’s safe to sleep.

Trading Crypto, and being able to sleep at night

If you’re anything like me, you spent the last few crypto bull markets trading like crazy, and the years in between forgetting all of the lessons you learned.

The biggest part of crypto trading I always forget, is the psychology of it. That’s what I want to write about today: being able to trade and actually sleep at night. That is, without waking up at 4am, checking your phone, making a stupid trading decision, and feeling like a total idiot afterwards.

Fair warning: I’m on the ‘extreme amateur’ side of crypto trading, and the chance of me offering you any meaningful advice on what strategies to use to actually make money, is virtually zero. What I want to do instead, is tell you how to manage the psychology of the trade.

The psychological factor is what lets you sleep at night, what saves you from having extreme mood swings, and what lets you operate as a normal human being while you’re trading, without constant paranoia and regret. Psychology won’t stop you from ever losing money, but it will dramatically take the edge off when you inevitably do.

Losing money at some point while trading is normal and unavoidable, at various points in your career. Feeling like shit afterwards does not have to be.

Deciding on a position

So, you’ve decided you want some exposure to a set of crypto coins or tokens that you’ve vigorously researched, you understand the technology, you’ve downloaded the wallet and tried it out, you’ve read about its history and where it’s going.

Or some rando on twitter recommended some token, the tweet got 10,000 likes, and the guy had a cool avatar. Pretty safe bet too.

However you do your due diligence, the important part is that you do something to persuade yourself it’s a good idea to make this trade, other than “this will make me money, because it will go up in price”. When you see the price fluctuate after a trade, you need to be able to tell yourself: it doesn’t matter, I bought in at a price I considered fair, and I bought in because I found enough value in the asset.

For instance, maybe you decide to buy into BTC because you think it will replace gold. Maybe you bought ETH because you find the idea of decentralized smart contracts magical. Maybe you bought NANO because free, instant payments are bound to have a place in our future civilization. Maybe you bought DOGE because it’s fun and nobody can persuade you otherwise.

Doesn’t matter what the reason is. If you can’t give the 60 second elevator pitch for what you’re buying, other than “the price will go up!”, you will feel like shit later when the price dips and your portfolio value goes down.

This kind of due-diligence isn’t about being sure you’ll make money. It’s about not having to beat yourself up if you don’t.

Buying a position

The only advice I have here is, resist the temptation to buy in immediately after a huge parabolic spike in price.

Yes, there is a chance the price will keep spiking. Yes, you might miss out on further gains from the momentum of the spike.

But even if it does keep spiking, unless you’re lucky enough to identify the top, and disciplined enough to sell at that top, it’s almost certain that spike will be followed by a dip. Worse, this implies the only reason you’re trading is for the immediate price action, regardless of the true value of what you’re buying.

Some people dollar-cost-average into trades. I personally only buy in when the price just either took a huge dip, or when it’s been flat for the best part of a week. I don’t care if I’m buying at the absolute bottom or not; I just want to feel like I’m getting a fair price for what I’m buying. If I don’t do this, I inevitably end up feeling miserable about it afterwards.

As a bull market goes on, I find it psychologically harder and harder to trade, so I do most of my trading early in the cycle, and less later. That gives me more opportunities for buying dips without worrying that I’m buying in on the way down.

Deciding how much to spend

This is a very personal decision, and depends on your risk level, how diversified you are, how old you are, what your job situation is, and other factors.

The classic advice is of course: “don’t put in more than you can afford to lose”. That is: if you lose it all, it’s going to hurt, but you’ll get over it. If you think you won’t get over it, you’re making a mistake, and you shouldn’t be trading.

Hodling

Once you have a position, hodling is the easiest way to deal with the psychology of constantly fluctuating prices. With this approach, you don’t need to worry about selling high and buying low, and constantly improving your position. You just buy, and wait.

The biggest decision you ultimately have to make is: when should you sell? Unless you wait too long to enter the market, and buy at the absolute peak, that’s honestly a pretty great decision to have to make. It’s often a decision between taking a little profit, a medium amount of profit, or a lot of profit.

If your gut is telling you the absolute peak is close (that is, any time in the next month or so), I recommend not jumping in, even if your plan is to hodl. There will be better opportunities in future, you just have to be patient. If you feel like you’re buying in too late, but you do decide to buy in anyway, the psychology of hodling will eat away at you and it won’t be at all easy or fun.

Trading

Don’t trade coins or tokens you think still have value at the current price point, unless you actually want or need the cash. The classic blunder here is, selling a coin, watching the price rise, and then feeling compelled to buy back in at a higher price point because you actually still wanted exposure to that coin. Smarter people than you have fallen into this trap.

I actually like to use margin when I’m trading, because it reduces my anxiety. If I see a coin at a fair price, and I think it has a high chance of increasing in value, I buy into a margin position.

The key is, the only time I do this is when I have enough cash or other assets that I wouldn’t mind using to settle the margin position in future, and actually buying the coin or token, even if the price has gone down in the short term. I need to have enough conviction that the price will go up in the long run, and that I’m not buying in at the top.

Once I have a margin position, I tend to set a price target, then enter a limit sell order, then wait for the coin to reach that price. If it doesn’t do that in a week or two, I settle my margin position and buy the coin. If it does, I usually use the profits I made to buy into a spot position in the same coin, unless its price is already at breaking point.

Margin isn’t cheap: it’s a loan, you’re paying interest, and it’s way too easy to use more margin than you should and over-leverage. But if you use it sparingly and you only spend margin that you’re able to settle later, this is a great way to make extra cash during a bull market. That way you avoid the crushing psychological pain of losing spot balances or spending money you don’t have, or over-leveraging and losing everything if the market turns against you.

Shorting

Wouldn’t recommend it, especially not in a bull market. The psychology of those infinite losses will kill you, unless you’re happy to make a bet with a stop loss and be prepared to just write off that cash. I avoid shorting because I know I’d struggle with that.

Walking Away

It’s perfectly fine to close out your trades and walk away for days, weeks or months, until you’re feeling happy and confident again. Successful traders do this a lot. Trading doesn’t have to be a full time job, and immediately trading to make up for a bad trade is usually a terrible idea. Even if it’s a great trade on paper, you’re coming at it from a point of lost confidence, and you’ll be more likely to make a mistake or do something you’re not comfortable with.

If you need to walk away for a while, just do it, and don’t look back.

Watching the charts

Should you check your portfolio balance every 5 minutes? Probably not. Will you? Absolutely. So don’t feel guilty about it, but don’t get too attached to the numbers you see, because they will change more dramatically than you could have ever predicted or prepared for.

If you’re going to do this, my advice is to stop thinking of it as money. It’s just numbers on a screen, the numbers might go up, or go down, or double, or go to zero. Until you decide to sell, it’s not real, and if you mentally bank any gains you’ll be crushed during any dips or corrections.

My advice: treat it like a game. If you have more cash in the game than lets you sleep at night, take some profits out until you’re happy again. If not, enjoy the bull run while it lasts.

Staying happy and safe is everything. No amount of money is worth letting the psychology of trading crush you.

Thanks all!

— Daniel