How To Trade The Next Big Little Crypto

Carl Hazeley

about 2 months ago3:12 mins

How To Trade The Next Big Little Crypto

Cryptocurrency “meme coins” like Dogecoin and Shiba Inu may have started off as a bit of a joke, but with respective market caps of $28 billion and $25 billion, they’re no laughing matter. And while it’s as difficult as it is tempting to find the next meme coin destined for greatness, here are three strategies you can try to set you down the right path.

Strategy 1: Treat small coins like microcap stocks.

Crypto tokens with a low market cap – like Floki Rocket with a market cap of just $4.5 million – have a major risk in common with low-market-cap stocks: low liquidity. After all, you need a willing seller or buyer in order to buy or sell, which can be hard to come by when you’re investing in coins that are so small. That can leave you subject to wild price swings until you can get rid of them, or left on the sidelines watching a coin’s price rapidly rise before you can buy in.

So it’s worth adopting a trading approach often applied to small and microcap stocks: investing in stages.

First, set your budget for the investment (this Insight tells you exactly how to do that). Second, split that budget into three. Third, invest in three stages. This lets you buy in at a more attractive average price if prices fall in the short term (which, given low liquidity, is always a risk), while getting you invested early enough to benefit from price increases.

Example split trade

In practice, you’d buy more when the price drops after your initial purchase, and potentially more again if the price recovers and you think that recovery has further to run, managing your position into profit along the way. As for what might give you the confidence that it does have further to run, onto the second strategy…

Strategy 2: Set – and keep to – your buy and sell price alerts.

Technical analysis can help microcap stock and crypto sellers time their short-term buying and selling. To put this into practice, you’ll need to identify the relevant levels for your given coin that signal buying and selling opportunities and set alerts to let you know when those signals are flashing. If your platform allows it, you could even set up automated instructions that can take action on your behalf.

As for what sort of technical analyses to keep an eye on:

1. Fibonacci levels.

We got into detail on this technique here, but here’s the short version: dividing a number in the sequence by the number after it always gives the same approximate answer: 0.618 (61.8%). Dividing it by the number two places ahead gives 0.382 (38.2%). And dividing by the number three places after always makes 0.236 (23.6%). So if a coin rallies from $100 to $200 before starting to fall again, Fibonacci levels suggest the decline will end down 23.6% – at $176.40. If the drop breaches that level, $161.80 – down 38.2% – is the next price to watch, and so on.

2. Psychological resistances.

There’s something oddly pleasing about easy-to-remember, round numbers, which is sometimes reflected in trading patterns. Simply, if a coin’s price passes a milestone figure like $100, traders will anchor to it. That means any future selloff – say from $112 – might start to slow as it gets closer to $100, or that the price will quickly bounce back to that round figure if it drops below, seemingly for no particular reason.

3. Relative strength index.

The relative strength index (RSI) is a technical analysis tool that looks at an asset’s recent momentum to indicate whether it’s been overbought and is therefore likely “due” a drop in price, or oversold and is therefore likely due a rise in price. RSI readings are between 0-100, with anything under 30 usually indicating an oversold asset, and anything over 70 indicating that it’s overbought. Just remember: you need to overlay this analysis with an asset’s price chart to see if the price has actually been going up to tell if it really is “overbought”.

Underpinning all technical analysis is an element of human psychology: some investors swear by it because the technique’s predictions can become self-fulfilling prophecies. And despite technical analysis’s many drawbacks, it can offer pretty informative signals in crypto – especially with low-market-cap coins, where there’s precious little else to go off.

Strategy 3: Be disciplined about when you sell.

Managing your position is important whatever assets you’re trading, but it’s paramount when trading small, low liquidity cryptos.

A tried-and-true method involves simply selling half your investment once it’s doubled. That lets you take your initial investment off the table while remaining well able to benefit from any further increases.

A more conservative approach would be to sell 20% of your position after it rises 40%, then sell 20% of what’s left after it goes up another 40%, and so on. After two turns, you’ll have taken around 60% of your initial investment off the table, but will still have a stake 25% larger than you started off with. The idea’s to keep hold of your winning investments as long as possible while mitigating your risk.

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