DISCLAIMER: This is not financial advice, nor is this the method everyone should follow in every situation across the board, but I keep getting many questions about this, and although many others have alluded to this subject in their posts, I decided to write something up that is a bit more specific. Again, this is not the be all end all, and any numbers or rates I mention here are simply to provide examples and a baseline for how to strategize.
**Special Note: Risk management is everything. If you haven’t figured out your tolerances, that is where you need to start. Preferably with paper trading, so you don’t learn your lesson the hard way as many of us have.
Things to Consider Before Making a Play
Taxes - Depending on your country of residence, you may or may not have capital gains tax. The one thing that most countries have in common is that the moment you “sell” is the moment you have sealed your fate. Be familiar with your laws on this and keep track of your transactions if your broker/exchange doesn’t do it for you, it will save you a serious headache come tax season. For most of the following I will be speaking from a U.S. perspective since that is where most people in this community are trading from.
Long Term or Short Term - This is what separates the HODLers from the swingers and scalpers. Commonly, a “long-term” trade is anywhere from 3+ months to a year. A swing trade can be from one day to the next or a few months, but the idea goes into a grey-area after this for many people. A scalp is an intra-day trade, usually within the span of seconds to no more than a few hours. The bottom line is, if your trade happens within a calendar year, it’s technically seen as “short-term” for tax purposes, and you should heed my advice from the previous section. And for all intents and purposes, a “trade” that happens years after the initial buy is usually considered an “investment” not a “trade.”
Timeline for Your Strategy - Somewhat coincides with my previous point, but how much time do you plan to set aside for this play? Do you need the money soon for another play? Are you ok with having those funds tied up for a while? Will you be able to monitor your ticker(s) for the entirety of the play or have a way to “set and forget” it? Which leads me to my next and final thing to consider before getting into a play…
Knowledge and Tools - You will never have a guaranteed profit. With that said, you can be confident in your plays if you have put in the work, done your DD, and stick to your plan. Set your buy/sell limits and stops, learn HOW to set them if you don’t already. I’ve said it once, and I’ll say it a million times: YOU ARE NOT FASTER THAN THE MACHINE. Forget the “what-if” scenarios, that shit will get you burned or drive you crazy. Discipline = Profit. Small, consistent gains will still get you that 100%+ increase we all love to see, even if it takes a little longer. Manage your risk and know how to use your broker/exchange to get you your money.
Making Your Plan
WRITE YOUR PLAN DOWN. Eventually, you will have this down to a science and be able to do this in your head while working out the TA, but until then, do yourself a favor and write down your method.
Account for volatility. If you’re playing with a smaller company or crypto, 5-10% swings are not uncommon within a matter of minutes. With crypto, sharp increases and cliff dives of 40-50% are also common for smaller cap projects. Know your tolerance and look at the ticker’s history.
Cover your cost basis. When I learned to do this, it made my anxiety from trading go down to almost nothing. As long as you cover your original investment, when that ticker starts to moon, anything after what you paid upfront is just gravy. We call it “playing with house money” because the money you stand to lose after this is not anything that was ever “yours” before. Have an idea, however, of what profit percent you wanted to get out of the play. (More on this below)
To Moonbag, or not to Moonbag? That is the question many of us face, ESPECIALLY in the crypto world. So you cover your cost and then some, what do you do with the extra? Well, you can either take all of it and move on to the next play, or you can use that DD you put your heart into, and determine whether this ticker has a real shot of moving up more. If you think it’s worth a shot, leave some money in as your “Moonbag,” or Hail Mary shot, in case it does spike up suddenly, and this way you won’t miss out completely. Remember, this is AFTER you’ve covered your costs and taken the profit you planned to take.
You have ticker $XYZA, you did your DD and you know some bullish catalyst is about to make this thing climb. You put in your money, set your limits, and watch the events unfold:
Ticker $XYZA was bought at $2/share for 100 shares.
Cost: $200 (100 shares x $2 each)
End PT: $3.00
Price hits 2.25, sell 25% (25 shares)
Price hits 2.50, sell 50% (37.5 shares)
Price hits 2.75, sell 75% (28.13 shares; covered cost and 13% profit)
Price hits 3.00, sell 100% (9.37 shares; about doubled your profit, now 27%)
Now, at this point I’ll mention it will never look this pretty. Many factors can throw a wrench in your plan, which is why I always suggest covering your cost as early as possible, especially if a play seems to be going sideways. This is also why stop losses are so important, unless you don’t mind holding whatever ticker you bought down to the depths of price hell and hoping for that climb back up at some point in the future to get out at least even. After all, just like your gains, your losses aren’t realized until you sell or the company falls off the market.
Same ticker, $XYZA, but after hitting that $2.5 mark, shit goes sideways and all the bears come out to play. What to do?
A) Take your profit. If you’re lucky, catch the signs in time, and are able to react, sell the rest of your position and still make it out with some gains, or at least break even. Assuming you catch it perfectly, you may still be up about 20% when this is over.
B) HODL. Not recommended, unless you foresee a pop back up in the not so distant future. But given that you didn’t see this shitstorm you’re already in coming, I’d say just don’t.
C) Let the stop loss trigger. Hopefully you had the wherewithal to set one after the climb began, so now even if this ship sinks closer to its support levels at $2, you maybe, just maybe, still squeak out at just above $2 and get to keep some change in your pocket. Or, you set it under $2 and take a minor loss compared to what happens to those HODLer guys that then panic sell in a week or two, because “ape brain…”
Some common percent strategies:
Take out x% for every x% the ticker rises, after your cost is covered ( 5% at 5% over, 10% at 10% over, etc.).
Take out your cost basis and have a hard limit set of x% above that to sell out of your position.
Take out 25% every 50% rise. More so for crypto given how high these coins can swing.
Take out 50% at 25% over and another 50% at 50% over, let the rest be your Moonbag. Again, more for crypto.
Make a plan, stick to it. Do your DD, set your limits, and make time to monitor your play. As always, take profit. This isn’t a pet, or your favorite stuffed animal. Your personal emotions will not save you. There is always another play. Take. That. Green.
For more information on taxes in the US in relation to crypto click here