Hello Steemit community,
I keep on seeing videos and reading articles on the web that keep on ranting about how trading & investing in cryptocurrencies is risky.
In today's post I will be explaining the difference between the words risky and risk and why knowing the difference is so important.
Something that is risky has an unknown and unpredictable outcome. The outcome of a trade, investment, or activity could be considered risky if you are not making your decision based on any criteria. I would agree that purchasing a random cryptocurrency without having done any analysis, without having an entrance & exit strategy, and without having a time frame in mind is risky. Buying anything at an all time high because you keep on seeing it go higher and higher is risky. People call this FOMO (fear of missing out). You want to purchase something because you hear how so many people have made great profits. That is risky. If you enter a trade at an all time high without setting a stop loss (stop loss: a % loss at which you call it quits and sell your position in the red; a very important thing to do), you are making a risky decision.
On the other hand, if you enter a position at an all time high, but have a game plan, there is risk involved but the trade is no longer considered risky. You have a defined situation. You create your own defined rules for the trade.
The first and most important part is the definition of your risk-reward ratio for the trade. Lets say, you set a 1:3 ratio. This means you sell, for example, at 10% loss or sell at a 30% profit, regardless of anything. You wait until either of the scenarios occurs and then act accordingly. By doing so, you can find out what type of analysis is proving to get you more winners and what type is getting you more losers. Like this, you can acknowledge, document and modify your analysis to favor the method which is granting you more winning trades.
You have done your analysis and believe it is more likely for the trend to continue than it is for the trend to be broken and have the coin turn around in value. It is okay to buy a coin at an all time high if it just broke an all time high. If the coin has been breaking all time highs for hours or even days, the likelihood of the trend to continue is much lower than if it just began.
A time frame or another criteria such as defined limits on indicators are also important. If I notice a coin is oversold or overbought I am open to changing my first rule to create a new defined rule to which I will stick. For example, I am willing to exit a trade early if the Relative Strength Index and the Stoch RSI agree with one another that a coin is extremely overbought. By understanding this, I can tell that a local high has been achieved and it is time for a new local low to be generated. Then, I wait until the indicators tell me it's time to re-enter the trade and I set new defined rules such as 21% profit or 7% loss from the new entrance.
Trading and investing is a perfect example of capitalism. You can start any trade whenever you want and end it whenever you want. You can buy at whatever price people offer and you can sell at whatever price people are demanding. You can long (predict the price will go up) or short (predict the price will go down) a coin at any time. By having such extreme freedoms you can place yourself in a risky position. But, if you generate rules for yourself and for your trades you can turn risky into risk.
Risk is manageable and risky is not.
When/if you trade, make rules for yourself and stick to them. By doing so, you can learn what is working for you and what is not. You can then learn from your trading log and find out which indicators and which patterns are acting as you predict and which are not. By doing so, you can stop trading the patterns and indicators that are harming your portfolio and add to the patterns and & indicators which are benefiting it.
Risk is calculated & risky is leaving the outcome to chance
I hope this post was able to change people's minds on the idea that trading is risky.
Trading is only risky if you don't have a plan!
Yours truly,
Lucas Hohl-Marchetta.