Different phases of the market cycles lead to different types of coins getting attention - and some of these can be significantly less rational than others. This is especially the case when we see increasing interest in tokens with little to no fundamental value, known as memecoins. Such tokens have gained a lot of hype after the price of Dogecoin rose incredibly quickly in the first half of 2021, and we’re seeing a similar phenomenon now in the wake of Shiba Inu pulling a similar move.
Many people are doing what has been called aping into different cryptos, which is basically a degenerate style of investing and/or trading where little to no consideration is given to fundamentals and the tech and team behind a project, and many are treating it as a lottery ticket with the hopes of getting rich.
Dogecoin was one of the first to fuel that hype. You may ask, what is wrong with chasing after some of these pumps to make a profit? Depends on your goals, your strategy (or lack of one), and your risk management. Many of us who were in crypto in 2016 and 2017 know the pain that many felt in 2018 and 2019 when the market entered a bear cycle and the entire market was in a massive downward trend.
Many who overextended themselves and went all in at the top of the market in 2017, jumped into every ICO (Initial Coin Offering) in 2017, or those that rode the long wave up in 2017 saw their profits get entirely erased in 2018. This How To blog - updated and rereleased due to the recent market events - is designed to be a warning to everyone. We’re not saying to stay away from all the hyped coins and tokens that have just been released, but learn how to protect yourself from your own reckless behavior.
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Chasing what can be described as pumpamentals (a word used to describe chasing hype) is ok with the proper amount of expectations and risk management. You must also learn to control the FOMO (Fear of Missing Out) buying which is when most people finally hear about some “new” coin or token and they dive in at the top of a market cycle while those who were truly in early dump on them and prices fall along with new people’s profits.
Now let’s look at 2 things you need to do to protect yourself from getting burned in a pump and dump, learn to practice proper risk management and balance your emotions with education. Remember, those stories you hear of someone getting rich from investing are usually the exception and not the normal, just like a lottery ticket and a lottery winner.
RISK MANAGEMENT
First and foremost, learning to exercise risk management is the most important thing you can do. Most of what we are seeing is people jumping into these hyped cryptocurrencies with no plan in place.
Risk management involves you deciding before you get into a trade or investment how much you are willing to lose and what are your take profit points. You do not have to decide where you will take out all your profits, but at least the points you will take out your initial investment amount. You must also decide how much you are willing to lose, which means at what point if trade goes the opposite way, will you decide to exit a trade. Something else you can do is learn how to set a stop loss so that you exit the trade automatically.
A stop loss is a point where you will exit a trade if the price drops to a certain level you set. Initially this can be the amount you decide when you enter a trade when to get out if it goes the opposite way. But a stop loss can be used to preserve profit after an investment or trade has gone up. Once you are in profit on a trade, you can raise your stop loss to above your break even point to make it a risk free trade and also raise it as profits increase. At this point, I’d recommend you learn how to identify support and resistance levels as this is a key indicator I have used to determine take profit points and stop loss levels.
There’s no clear way to know where to set a stop loss without looking at the specific chart, so the distance from entry to the stop loss will vary. Still, you need to manage your risk so that you can’t lose too much on a single trade, and a good rule of thumb is to never risk more than 2% of your portfolio on one trade. The way you do this is by modifying position size: let’s say you’ve got a portfolio worth $100,000, and you’re taking a trade where the stop loss is 10% below your entry. Given that you’re willing to risk $2,000 (2% of your portfolio), you should enter the trade with a position size of $20,000, since a 10% drop (= your stop loss) would lead to you exiting with your predetermined maximum loss.
Having an appropriate position size is important so that you don’t overextend yourself on any trade or investment. When people get too emotional and make reckless decisions, this is often because they are risking too much on a single trade. Your level of risk should match your understanding of the market and/or your willingness to accept any loss if the trade or investment goes down after you buy.
CONTROL EMOTIONS
Learning to control your emotions is the other key thing you need to do in your investing and trading journey. One way to do that is to balance your emotions with your education on the cryptocurrency space. You do not have to have much skill to get started, but the more you learn, the better equipped you are for whatever can happen in the future of the cryptocurrency market.
Emotions can cause you to panic sell after a cryptocurrency has dipped or to FOMO buy into something that has already pumped. There is nothing wrong with either if you understand the risks, but most that give in to these emotions do not understand it. Everyone knows to buy low and sell high, but emotions fog your decision making and cause many to do the opposite. If you do buy a cryptocurrency after it has already risen quite a bit, that should only be if you already have a solid thesis for why you think it will go even higher, as well as a set stop loss so that you risk is limited.
One tool you can use to check the market sentiment is the NewsCrypto AI Sentiment tool. This tool combs through social media posts and other news all over the web to show what the market sentiment may be for a crypto to go up or down. This is not 100% accurate, but overall has performed extremely well so far. You can use this as a confirmation after looking at other indicators.
This strategy can help you avoid the FOMO buying that we discussed. Do not be blinded by greed and the hopes of massive gains and miss the warning signs of when to maybe exit a trade, or when to not even enter one because you missed the opportunity. Trading opportunities are not limited. There will always be more if you missed a good one. Just continue to learn to research the market and learn to create and stick to your trading and/or investing strategy no matter the emotions you feel.
There will always be another opportunity in the market to make profits. The only question you have to ask yourself is, will you take the time to level up yourself and your trading and investing strategy so you are prepared to profit over the long term or are you going to be short sighted and chase pumps hoping that one will make you instantly wealthy?
Digging into the NewsCrypto platform, app, and blogs can help you with that journey. You just have to decide that it is important to you.
Written by Blockchain Wayne and NewsCrypto Team
