Like many other people, crypto currencies weren’t really something I looked at seriously until the staggering rise in their valuations in 2017.
In December and January, the price of Ethereum went from under $500 to over $1,250, more than doubling in two months.
The entire world got very excited.
Everyone seemed to be looking at these currencies and talking about buying it.
Was crypto something I should get into as well?
Buying a crypto currency is not like buying a stock or an index fund.
With a stock, we are taking an ownership stake in a company, with underlying cash flows and the possibility of growth and more income over time.
As an owner, we share in the growth (or not) of the business – and it makes sense to buy good businesses and hold them over time.
An index fund that covers a market is taking a position that an entire economy will grow and we will share in that.
For example, a S&P tracker will simply follow the performance of the largest companies, and they will probably be worth more in 20 years than now.
Cryptos are a pure trading play
Currencies don’t work like that – they have no intrinsic value.
They are worth what someone else is willing to pay for them in another currency.
That means we need to understand how buyers and sellers in that market work.
I needed a trading method
In many situations, we only need to be good at the buy side.
We’re going to buy and hold for the long term – and as an investment method that works quite well for things like buying stocks or making decisions on commodities like electricity and gas that we actually need for our homes and businesses.
In trading, however, we need to be good at the sell side as well.
More than good actually.
Lets say that we are 70% right at picking when to buy. That seems good, right?
If we are also 70% right at picking when to sell, then for any trade that involves a buy and sell, our probability of success is 0.7 x 0.7 = 49%.
That means we have a less than 50% chance of being right over time on both elements.
That’s where a system comes in, so my first step was to code one up to use for crypto currencies and I decided to apply point and figure charting (P&F).
A P&F system is designed for long term traders that want to understand how buyers and sellers are operating and make decisions on taking positions in that market.
The picture above is a snapshot of my P&F chart for Ethereum.
A position with actual money makes it more real
It’s easy to talk about what we would do, but to really get a feel for how we will act in a trading situation, it’s necessary to put down real money.
After the fall in value in February 2018, I entered the market with a very small position on the first reversal – marked as BUY on the chart.
I bought at around $725, and set a stop-loss at $650 – the red line.
The price went up a bit, down a bit, up a bit and then started to come off consistently during late February and into March.
When it crashed through my stop – I sold.
There isn’t much point having a trading system if you don’t stick to it
The point is that my sell wasn’t due to market conditions or timing or emotional decision making.
At the time I bought, I had a sell in mind, both for the upside and the downside.
This was a trading play, not an investment one – so when it went against me, the only rational thing to do was cut my losses and stop playing.
The next thing to answer is – when should I enter the market again and have another go?