Profit Protection Guide

Market Meditations | April 19, 2021

It’s easy to make money in a bull market when everything is pumping. Bitcoin dips such as the one we have just experienced are powerful reminders of how the tides can turn. And just how quickly too. If you panic during a dip, you’re probably overexposed. Let’s recap on protecting your profits.

1️⃣Trade With a Plan 

WHAT IS IT: the best way to limit the inevitable emotional reactions that come with trading is to develop a complete trading plan from entry to exit before you even open a position. That does not just include where you take profit but also where you accept that you are wrong and limit your downside: your stop-loss level. Doing this before you open a position ensures you are not susceptible to emotions such as fear and greed. Greed encourages you to not take out profit and fear encourages you to not cut a losing position because you are worried the price will bounce. Before you put money or skin in the game is when you can think most clearly and therefore when you should create your plan.

MYTH BUSTER: A splash of greed and a sprinkle of hope is not a trading plan.

GETTING STARTED: a trading journal can help you create a plan. Trading journals can be physical (on a notebook) or electronic (using programs such as Microsoft Excel or software packages like Edgewonk). We have a newsletter article to get you started: The Art of Building A Trading Journal. Once you have a trading plan, you can begin paper trading (trading without actual money) to test your strategy. Once it is tested and you are comfortable with it, you can decide to use real money. 

LEVEL UP: The way to level up your trading plan for non-beginners is to start taking a macro overview of your various strategies and consider risk:reward and the highest probability plays. A great book to get started with this is Trade Your Way to Financial Freedom. For those who are more visually inclined, we have a Risk to Reward Ratio video guide.

2️⃣Use Stop-Loss Orders

WHAT IS IT: a limit or market order to close a position at loss. An order to limit the amount of money you can lose. This is the ultimate risk limiting tool. If you trade without a stop loss, you are exposed to virtually unlimited risk. You don’t even have to mentally frame a stop-loss placement as being “wrong”; you can also consider it as a means to mitigate randomness. For even if you can’t fathom the possibility of being wrong, random events are undeniable.

MYTH BUSTER: Liquidation is not a stop loss.

GETTING STARTED: simply place a stop-loss order on an exchange (once you have lost a certain amount, the exchange will execute and take you out of your position) or enter with a very small position size that you are willing to let go to zero. For more guidance on this, check out our YouTube video: Only Stop Loss Guide You’ll Ever Need.

3️⃣Leverage To A Minimum

WHAT IS IT: Leverage involves borrowing a certain amount of money needed to invest in something. In the case of crypto, money is usually borrowed from a broker. Leverage can be your friend: minimise your counterparty risk. By way of example, if your net worth is $100,000 you can keep $90,000 in cold storage and put $10,000 on an exchange with 10x leverage. Meaning your position size if $100,000. The problem arises when you use 10x leverage on your entire net worth of $100,000. Creating a $1,000,000 position and putting your entire net worth at risk. When it comes to position sizing, you should really only risk 1-2% of your portfolio on a trade. Patience is rewarded in the market. You can’t get rich quick by risking too much on a single trade.

MYTH BUSTER: Playing with leverage on shitcoins will not make you an overnight millionaire.

GETTING STARTED: There are a series of prerequisites before diving into leverage trading. Anything above 1x is not conservative and leverage works in both directions: increases your upside and downside on a given trade. A thorough understanding of technical analysis, system development, risk management and trading psychology are required in the first instance. For it is only with this knowledge that you’ll be able to identify trades with a higher probability of upside and lower probability of downside. Unless you have this insight, you don’t want to be applying leverage where your chances are 50/50. If you are convinced that you have this foundation, you can turn to our All in One Guide to Using Leverage.

4️⃣Stay on Top of the Market

WHAT IS IT: Make sure you have reliable sources of information to facilitate fundamental analysis. This won’t guarantee a winning trade but it will alert you to potentially disruptive circumstances that you can factor into your trading plan to limit overall risk.

MYTH BUSTER: Technical analysis alone won’t allow you to see into the future.

GETTING STARTED: The approach we recommend for staying on top of trends is twofold.

  • The first component is to subscribe to a few newsletters and podcasts such as Market Meditations in order to stay up-to-date with the latest trends. We say a few because it’s essential to be able to filter the signal from the noise. For more on this check out Nate Silver’s book.
  • The next step is to engage with various crypto communities. Follow whichever accounts you like on Twitter, Telegram, Discord and interact with people.

Outside of trends and narratives, we can look to other tools such as on-chain analytics. On-chain analysis is a fundamentals driven approach rather than based on hype, sentiment or technical analysis. This type of analysis can be focused exclusively on one crypto-asset by looking at historical trends or can be used to compare different crypto-assets to identify undervalued/overvalued coins. One of our favourite platforms or this is

5️⃣Take Profit Regularly

WHAT IS IT: countless people had life changing money in 2017 but they failed to follow this step. It is essential to take profit regularly. For as long as your profit isn’t claimed, it is unrealized profit. And unrealized profit is not yet real. It is subject to volatility and you can’t use it yet. Remember why you are trading, it’s not just about the money but what you can do with it.

MYTH BUSTER: Keeping money is better than making money.

GETTING STARTED: If you’ve made some money in the market, make periodic withdrawals from your trading account. If you don’t like the idea of taking that money out into fiat, you can explore various ways to earn passive income on stablecoins. For this, we have a full passive income guide. Stablecoin yields are extremely high at the moment and provide a fantastic opportunity to reduce your exposure to crypto assets whilst gaining returns of about 10%. FTX and are our preferred platforms for this. In a recent podcast, Trader SZ explained that his preferred method to take profit is to identify ways to get back into the position. He identifies re-entry points through pullback or breakout scenarios.

That brings us to the end of the guide on protecting your profits. Mistakes are only bad if we don’t learn from them. If the most recent market dip caused you to panic, make sure you are comfortable with the 5 topics covered today.