In the new bull market cycle, how can trading novices succeed?

If you can protect your capital well, then profits will eventually come.

Written by: Eugene Ng Ah Sio

Translated by: Luffy, Foresight News

As Bitcoin reaches new highs, another batch of new explorers jumps into the cryptocurrency rabbit hole. After working in this field for many years, I have summarized some important psychological counseling experiences. Here, I would like to impart some of the things I have (painfully) learned, hoping you can do better than I did while learning trading skills.

The Golden Rule

If you can protect your capital well, then profits will eventually come.
Success can be achieved without leverage.
Decide in advance how much capital you will invest, and never invest more in the later stages of the cycle.

Minimizing Adverse Factors is Key to Success

The cryptocurrency space is filled with endless fantasies of hundredfold returns, which can trigger the maximum FOMO. Many of the screenshots you see are achieved through 10-100x leverage, but leverage can also lead to permanent capital loss. However, due to survivor bias, you only see the gains and not the losses.

I often ask myself, "What is the maximum amount I am willing to lose on this trade?" After that, I start to think in reverse to find a trading scale that suits me. In almost all cases, the loss I am willing to accept is the most important factor in my decision-making process. This is a useful benchmark, and my benchmarks are as follows:

Lack of faith: Maximum loss 1%
Normal faith: Maximum loss 2%
High faith: Maximum loss 5%
Extremely high faith: Maximum loss 10%

Leverage

Leverage is the number one killer of all market participants so far, and it is an extension of Golden Rule 1. High leverage (>5x) is absolutely unnecessary because we want to minimize volatility, and leverage doubles the volatility.

Typically, leverage stems from greed; we want to earn more from the existing pool of funds. This is a misguided perspective. What we should prioritize is operating under a good risk-reward setup, where downside risk is defined. For example, going long on a 4-hour retest or going long on historical support levels may be reasonable trades, so that even if you make a mistake in the trade, the capital loss is minimal.

Outflows, Not Inflows

The only moment you should enter cryptocurrency is the day you decide to fully commit to the field as an investor/speculator. While there are some exceptions to this rule, generally adhering to it will protect you from the second biggest mistake people make that leads to financial collapse: doubling down as prices rise.

In a bull market, what often happens is that you start to reduce your holdings because you lack winning experience, and you haven't yet experienced the later greed and excitement. At this stage, people tend to bet smaller amounts, possibly allocating 1-5% of their total net worth to cryptocurrency. After a few wins, your confidence skyrockets, and with an excellent track record, you believe you are capable of investing more aggressively. What people fail to realize is that everyone is a genius in a bull market.

After making adjustments in the later stages of the cycle, the initial 3% cryptocurrency allocation turns into 30%, ultimately resulting in losses when the bubble bursts. By establishing a strict rule of never investing more fiat currency, you can prevent yourself from making this mistake. If you find that your pool of funds has shrunk to a level that requires replenishment, then perhaps you shouldn't have participated in this speculation in the first place.

Get Started Immediately (Q4 2024)

If you have just discovered cryptocurrency or are ready to seriously understand this game, the following methods for entering this market may suit you.

Overall Framework

The cryptocurrency space mainly consists of two areas:

Centralized exchanges (CEX)
On-chain trading

To succeed, each area requires a completely different approach, and you do not necessarily need to master both areas to succeed, but you need to be proficient in at least one area.

The core of CEX trading is to quickly achieve percentage-based profits, where strict stop-losses can minimize your losses. A simple and good r/r (risk/reward ratio) is as follows:

Entry price: $1.00
Target price: $1.25
Stop-loss: $0.95
r/r = $0.25 / $0.05 = 5.0

How you set these variables depends on you, but the general framework is that you should set strict stop-losses to prevent downside risk. You are not playing for home runs, but if you continue to make successful trades like the one above, I guarantee you have the potential to achieve 3-10 times your account without leverage.

The core of on-chain trading is early multiple profits, where you minimize possible losses by investing in undervalued assets. A good on-chain r/r trade is as follows:

Investment target: FDV $2 million
Target: FDV $20 million
Stop-loss: Zero
r/r = 10.0

As you can see, early on-chain bets do not have a stop-loss, but you can increase the risk curve so that the size of a single bet does not need to be too large while still providing enough upside potential. If your account has a larger amount of funds, I believe the key target size for on-chain bets is 1% of the total token supply. Based on a $2 million FDV, this requires $20,000. If you manage a medium-sized six-figure account, this approach allows you to make reasonable bet sizes without risking too much capital loss, while also giving you enough risk exposure if you happen to encounter the next token listed on a top centralized exchange.

Conclusion

How to choose your own path depends on your investment style. I recommend that smaller accounts first try on-chain trading, and then, as your capital grows, eventually incorporate CEX trading into your game. Once your funds exceed a certain scale (like seven figures), on-chain trading will become a small part of your overall strategy. Remember, different trading methods require different risk mindsets, so being proficient in one does not mean being proficient in another (in fact, sometimes they may be negatively correlated).

While you may not have entered the cryptocurrency space early, now may be the easiest time to achieve high returns since 2021. You will face experienced and skilled opponents who have survived in the PvP trenches over the past three years, but you have a key advantage: free thought, unburdened by the past. By leveraging this, you may outperform the veterans in this new cycle.

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