Transitioning successfully from forex to cryptocurrency is a challenge for many traders. Much of what I will share here is based on my experience with the transition to cryptocurrencies; it is not the only way.
Much of what you already know from trading spot forex can be applied to cryptocurrency but there are some crucial differences, which, if ignored, can be fatal to your account.
The most important fact that forex traders must come to terms with is that they are NOT dealing with fiat currencies (€, $). Cryptocurrencies are not currencies in the traditional sense, and are not legal tender in any country. To put it another way: if you go to your local coffee shop, they are not required to accept Bitcoin as payment. Now, if the coffee shop were in Madrid and you had Euros, they would have to accept them because the Euro is legal tender in Spain. Cryptos are also subject to the regulatory whims of a government. A country, with little warning, could ban a crypto or a crypto exchange. This is not an everyday risk with fiat currencies; it is extremely unlikely that you will wake up tomorrow to a headline: ‘US dollar trading has been banned in the US’ or ‘New York State has declared it illegal for residents to trade on NYSE’.
The other issue that we are dealing with is technology. Cryptos can be programmed and I am unaware of any programmable fiats. We have discovered several cryptos that have not been able to live up to their promised capabilities. This doesn’t even include the cases where there was outright fraud.
New rules for news trading
The normal strategies of foreign currency economic news trading do not directly apply. For example, a Non-Farm Payrolls jobs report or a Bank of England interest rate announcement will have little to no impact on Litecoin. However, you can apply your experience of dealing with reactions to news to cryptos. For example, a concept familiar to many forex traders is market overreaction to news. Overreaction to news is almost a cliché in cryptocurrency trading because most traders are both new and unfamiliar with market volatility. In addition, you have thought-paralyzing levels of madness that have me scratching my head when I hear the stories of people who have maxed out credit cards just to buy Bitcoins. If I were in a situation like that I guess I would be overreacting too.
Technical analysis with 25,000% returns
On the technical analysis front, a lot of what you should know about support and resistance is useful. What is new is that you will need to suspend strict interpretation of support/resistance levels. You have cryptos that can easily jump 100% per month and, with many technical indicators, this would be considered massively overbought. However, with cryptos, a certain amount of suspension of disbelief is needed. Some proof? Pantera Bitcoin Fund returned over 25,000% (launched in 2013), or Ripple with 35,000% return for 2017. Not typos; both are easily verifiable with a simple Google search.
The best way to deal with movements like these is to acknowledge that what is going on is not supposed to but it is. We are in a new crypto universe that is expanding and changing with each day. What is legal today can be illegal tomorrow. What you read and assumed to be true in the morning, can turn out to be fake news by lunch.
Death of the purist
Being a fundamental or technical analysis purist will only leave you with an under-performing account. Therefore, you will need a robust risk management strategy using many of the tools that should be familiar to you. You manage the risk by having, as a foundation, my non-negotiable rule of being able to survive failure, which means only trade what you can afford to lose. From there you add a diverse portfolio of cryptos and only trade those with good liquidity. Happy Trading!
Guest post by Wayne Walker, Founder of GCMS – Created and launched one of the first cryptocurrency e-learning courses in Europe. http://www.gcmsonline.info/