Develop a Rules-Based Trading Strategy
If you want to achieve consistency and profitability in trading than you should develop a rules-based trading strategy.
A trading strategy is a system, which allows you to make trading decisions based on exact signals and risk-management rules, rather than on random guess or market noise.
This is what differentiates the top 5% of successful traders from the bottom 95%. The top 5% of traders have a profitable trading system that generates consistently accurate trading signals for them, while the bottom 95% of traders do not have such a system.
A trading strategy, allowing to make accurate trading decisions, is one of the most important factors that will make you a successful trader.
Every trading strategy is based on a particular forecasting model or a set of rules, suggesting to a trader when to buy or sell a particular asset.
Forecasting models can vary from simple combinations of technical indicators to more complex ones, encompassing fundamental indicators, chart patterns, trendlines and trend channels, and significant price levels.
If you want to develop a trading strategy, the best recommendation for you is to learn from experts and successful traders and practice trading every day.
For example, you can subscribe to the Monfex's channel on TradingView, which is absolutely free, read carefully the analysis attached to every trade signal, and then practice on your account. This will make you highly proficient at building trading systems faster than anything else.
Become Excellent at Technical Analysis and Trend Following
The second most important step to profitable trading is to become excellent at identifying market trends.
AN IMPORTANT INSIGHT:
Market prices are unpredictable. You cannot forecast future prices with complete certainty, because the future is unknown by definition.
What you can do is to follow the price trend.
Your goal as a trader is to identify the current direction of price changes and then follow the trend. Approximately 70% of time prices are in a trend mode, either up or down, and 30% of the time they are flat.
So, if you become skilled at identifying trends, you will be able to buy at low prices and sell at higher prices, thus making a profit.
In order to become skilled at identifying trends, you need to learn to apply technical analysis.
Technical analysis does work and it is very powerful.
The essence of technical analysis is studying price charts using technical indicators with the goal to eliminate market noise and identify the true direction of the price trend.
The most important tools in technical analysis are called indicators. Technical indicators generate signals allowing to make decisions about how and when to trade. The essence of any technical indicator is a mathematical formula, which allows identifying market trends that are invisible to the naked eye.
Become Highly Proficient with the Trading Platform
The third most important step to profitable trading is that you need to become excellent at using the trading platform.
This is because a trading platform is a primary tool that you, as a trader, will use to analyze price charts and make trading decisions.
Here are the primary tabs on the Monfex’s trading platform:
Market watch shows all the financial instruments traded on a platform. Click on any instrument name to open its chart.
The price chart is a visual representation of historical changes in the price. You can utilize different timeframes that are relevant to your trading strategy. You can choose between bars, candles, and other types of charts.
Her you can also use powerful technical analysis tools and drawing tools to find chart patterns by applying trendlines, trend-channels and regression analysis.
In order to trade, you must know how to submit a new order.
You can use limit orders, market orders and stop orders to execute trading strategies of any complexity.
Here you can observe your current profit or loss for an entire trading account. The profit is shown in the base currency of the trading account.
And the next two tabs show your activity log and your account history.
Trade on Multiple Instruments (i.e. Diversify)
The fourth step to profitable trading is diversification.
The concept of diversification relates to risk management and means that you shouldn't invest all capital in a single asset. Or, equivalently, if you’re a trader, you shouldn’t trade on a single financial instrument.
Diversification will help you to avoid disastrous outcomes for your trading account.
A perfect example would be investing in Bitcoin in late 2017 when its price was approaching $20,000 per Bitcoin. As we know now, this price became an all-time high, and since then the price depreciated by more than 85% at its lowest point in 2018.
So, lots of investors and margin traders have lost their deposits. They could have avoided this disastrous outcome if they had diversified their trading into other asset classes, such as forex and stocks.
So, here is practical advice:
Never trade on a single asset, such as a Bitcoin. Select the top 5 most liquid cryptocurrencies, and also add other asset classes, such as forex, equities, and commodities, and trade them all.
Over the long-term, your profitability will be much more safe and consistent.
Apply Effective Risk Management
The fifth step to profitable trading is also very important, and it is effective risk management.
Risk is an integral part of trading. Market prices are never predictable with complete certainty, and every time you enter a trade, you become exposed to the risk of losses.
There are three major risk-management techniques that you should follow if you want to achieve success in trading.
The first risk-management rule is:
— Never trade with high leverage —
Leverage is an important tool, and trading with leverage is standard practice for traders on all markets worldwide. With leverage, you can increase potential profits and, as a result, get high payoffs from small investments.
Some exchanges provide up to 100x leverage for Bitcoin trading. However, the optimal amount of leverage, taking into account the amount of intraday volatility of the Bitcoin price, is actually 20x.
With 20x leverage, your account will be able to survive unpredictable intraday deviations in price, while still increasing potential returns 20 times.
With this specific purpose, here at Monfex, we set a standard amount of leverage at 20x, which is reasonable and close to the optimal amount for intraday traders.
The second risk-management rule is:
— Always trade with a stop-loss order —
Stop-loss orders are used to limit potential losses on market positions.
For example, imagine that you bought Bitcoin at $10,000 and want to limit the maximum possible losses to $1,000. In order to do that, you should place a stop-loss order at $9,000.
If the price falls below $9,000, the stop-loss order will be triggered and your losses will be limited to $1,000.
The use of stop-losses is, perhaps, the most important mechanism of risk management of all.
The third risk-management rule is:
— Trade on liquid instruments with narrow spreads —
Less liquid instruments are those that have low trade volumes and a lack of investor interest. To avoid liquidity risks, you should trade only the most actively traded cryptocurrencies. This will ensure tight spreads and high execution speed of your orders.
The most actively traded cryptocurrencies, in addition to Bitcoin, are:
If you trade all of these five cryptocurrencies, you’ll have a diversified trading portfolio composed of highly liquid cryptocurrencies, with tight spreads and high execution speed of your orders.