Do not invest more than you can afford to lose
Any financial investment can produce losses, rather than returns. With a highly speculative investment, such as Bitcoin, there is a high chance that you can see very large gains or losses. By trading Bitcoin, there is also further scope to lose money from poor decision-making.
One should invest such an amount that they feel comfortable with losing completely — be prepared for the worst eventuality. There are two reasons for this.
Firstly, successful investors diversify their portfolio. Allocating too many funds to an asset class increases risk exposure. This makes it harder for gains in other assets to cover losses in another asset.
Secondly, investing more than one can afford to lose reduces an investor’s ability to make good decisions. In particular, there is a risk of ‘panic selling’ when the market declines slightly. Instead of holding throughout a market dip, one who is over-invested may panic and sell-off their holdings for a low price — attempting to cut their losses. This tends to lead to losing more money when the market recovers and the trader buys back at a higher price
2 Set goals for each trade
Setting goals helps traders remain level-headed during periods of extreme volatility. This is highly important for Bitcoin trading. When placing a trade, determine what price to take profits or cut losses in advance.
The benefit of this is that it is easier to prevent trading decisions based purely on emotions. For example, a trader with no target price may make a profitable trade, become greedy, and then fail to realize their profits while the market is still on their side.
This chart shows the typical emotions an investor may go through and how they make it harder to ‘buy low and sell high’.
3 Do not set stop losses too low
A stop loss is an automatic trigger to liquidate your position if your losses reach a certain value — essentially stopping you from losing any more. They are a good tool to take advantage of.
However, at BTC.sx we recommend that traders do not use a stop loss that is too small. Choosing 10:1 leverage means that your deposit is 1/10th of the position size. This deposit determines the stop price, the price at which a position can drop to until the deposit can no longer cover the position’s loss. At $200, the default stop will be $20 away (or 10% of $200). Anything less than the position’s default stop will increase the risk of a position closing out very quickly because of minor fluctuations in the price of Bitcoin.
4 Close unprofitable & leveraged positions within 24 hours
Leverage is borrowing or lending an asset in hope that it appreciates or depreciates, respectively. At BTC.sx, we give traders the ability to enter long (buy) or short (sell) positions with 2:1, 5:1 or 10:1 leverage.
If a trader shorted 1 Bitcoin at 5:1 leverage, for example, the total investment is 6 Bitcoin. To make a profit the price must fall, allowing the owner to reclaim ownership at a lower price.
However, the price of a Bitcoin must fall sufficiently to cover the trading fee and the interest fee charged on borrowing the 5 Bitcoin. Do not fear if this sounds complicated! We have integrated a breakeven calculator into our trading interface to automatically show what price movement is required to return a profit.
Our daily interest charge is applicable up-front for every 24 hour period with the first 24 hours being free. Thereafter a trader must ensure that there is sufficient balance in their account to cover the cost and ensure the position remains open for each subsequent 24 hour period. In the foreign exchange trading markets, this is referred to as Rolling Spot FX. As the Bitcoin market is volatile, it can be hard to make a daily profit when the price is prone to change direction quickly.
Put simply, we recommend that inexperienced traders close unprofitable positions within 24 hours to avoid paying re-occurring interest.