Investing in cryptocurrency, in its simplest form, is the buying of a currency at a price and selling it at some time in the future at a higher price. The difference being your profit. The buying and selling of these cryptocurrencies is your market.
As with any market, the forces of supply and demand dictate the price paid at any given time, which gives rise to the idea of market timing. You buy when something is plentiful, or even unpopular ensuring market price is low and sell at a later date when market conditions change and the price is higher due to scarcity of the item or when it becomes ” fashionable “. Easy, right.
The concept of market timing is probably the most misunderstood and the most crucial to investing success.
In order to “time the market ” one must almost have a God like understanding of not only current market forces, current affairs and political sentiments but also be an expert in human psychology. Many leading investors describe the market as being “an animal ” with a wild and unpredictable nature. This is the beast with which we must wrestle.
Timing though can be approximated fairly readily if one embraces the concept of leaving some on the table, or feeding the beast. By this I mean we need to abandon the idea of absolutes. Recognise that no matter how hard we try, we may never actually buy at an absolute market bottom nor sell at an absolute market top. By understanding this we can significantly reduce our risk by looking for confirmations of market direction and sentiment before risking our investment dollars.
We do this in many ways but the most popular and by far the easiest is by charting market prices over a given time frame. The x axis representing time and the y axis price. From here we can plot the direction the price has been moving in the past and try to deduce the most likely next movement either up or down. This is referred to as technical analysis and has given rise to a whole new science, along with the literally thousands of formulas, indicators and algorithms to try to predict the future price of whatever investment vehicle they are applied to.
Now let’s look at the time frame for our chart. This is crucial to meeting our investment goals. We first need to decide what type of investor we are, by this I mean thinking about what our investment goals are. Are we looking to take our profits in a few weeks to say, take a short break, get a new bike or something of that nature. Is it a bit more long term like a new car, a deposit on a house or that big overseas trip. Or is it the “Moon Shot”, building a retirement nest egg that will provide for you and yours in your twilight years. This is an important aspect as it will determine how we analyse the price chart and ultimately where and when we expose our money to the market.
For example, if we are looking at the first scenario, a short-term goal. We will look at a short-term chart, weeks, days, hours or even minutes. This tells us what is happening now. We aren’t all that interested in what happened months ago as we intend to only expose our money long enough to get our short-term profit target. We want to get in, grab a profit and get out. This is termed as day trading or sniping. To time this type of crypto trading is quite demanding and requires the trader to watch the market like a hawk to ensure the safety of his capital and return his profit target.
The next level is that of weeks to months, sometime out to a couple of years depending on the profit target. The trader is looking for charts that best reflect a trending price. In say a three month chart the investor is looking for a smooth upward curve of price from left to right with as little volatility as possible. This trader is literally banking on the price increasing steadily over a longer period of time and is less worried by the short-term fluctuations of the market however this trader will need to choose an investment vehicle with more “certainty”. By this I mean we must choose something that is say seasonal in nature. Buying at time when stocks are plentiful and prices low with the view to sell when they become scarce and therefor more expensive. This type of trader will be monitoring their portfolio and executing only a few trades per month to achieve their profit target. We call this type trader a swing trader or medium-term trader.
Our final example is that of the longer-term trader. This trader is looking for safety. The lower the risk the better. This trader is looking at long term price charts for patterns that equate to solidity and predictability of both profits and capital preservation. This investor is more looking for steady, and generally lower returns in exchange for solidity and predictability of the investment vehicle. As this is longer term, trades are very infrequent and portfolio management is minimal.
On analysis you may find that you fall into one or indeed all these categories, in which case I would urge you to clearly define what part of your portfolio falls into which category and trade your cryptocurrency accordingly.