Crypto Day Trading Rules to Trade Crypto Responsibly

No matter which asset class you are trading, doing so in a responsible manner should be a top priority for any investor. Let's take a look at some of the ways you can trade more responsibly and mitigate risks by being careful with how you trade.

5 min read
Key Takeaways
  • Responsible trading should be a top priority for every crypto investor. 
  • Creating a trading plan with effective cryptocurrency day trading rules and sticking to it no matter the market conditions is one of the best ways to trade responsibly and ensure long-term success. 
  • Trading plans help you to avoid emotional trading, revenge trading, and FOMO.
  • Traders should understand the risks involved with trading with leverage and how a trading plan should be adapted when margin trading is utilized. 

No matter which asset class you are trading, doing so in a responsible manner should be a top priority for any investor. This is especially true when dealing with cryptocurrencies, as their distributed nature and lack of regulatory oversight is an enticing landscape for would-be scammers. This is where crypto day trading rules come into play. 

Luckily, there are some crypto trading rules you can employ to reduce unnecessary risk, minimize losses and ensure that you only trade with what you can afford to lose. Here’s a quick guide to help you learn how to do cryptocurrency trading safely, better manage your trading, determine your limits and improve your overall trading responsibility. 

Responsible Trading Defined

There is more to trading crypto responsibly than managing positing sizing and limiting portfolio exposure. It's often said that you are your own worst enemy, and that becomes painfully relevant when emotions take over a trading plan. The cryptocurrency trading rules you put in your trading plan cannot be based on emotions.The first step in trading responsibly is taking accountability for one’s actions so that your approach can be modified to one that truly works for you. 

Not only is it considered a higher risk to trade crypto, but the ecosystem also has no shortage of margin trading platforms that promise large returns by offering leverage of up to 100x. These capabilities, combined with a volatile market that regularly sees tokens increase by 20 to 100 times in a manner of days to weeks, makes the crypto market a struggle to navigate responsibly for some traders who may need to seek the help of gambling specialists. 

In general, one of the safest approaches in crypto is buying on the spot market and HODLing in cold storage, though it might not seem as glamorous. 

Above all, trading responsibly requires avoiding behaviors and activities that can lead to irresponsible trades, including understanding when your decision-making capabilities might be negatively influenced. As with most things, responsible trading is a skill that improves over time, but even experienced traders will tell you that learning to master your emotions and stick to your trading plan are two things that investors will always need to be mindful of. 

Tips to Help You Trade Responsibly

Here’s a rundown of some of the most common methods for how to crypto trade responsibly. The more of these tips you put into practice, the more you will reduce your risk and improve your trading skills. 

Create a Trading Plan

Day trading crypto rules offer the best way to check emotions at the door and implement a data-backed trading strategy that offers a higher chance of success. The hardest thing about trading plans is sticking to them when the market is moving quickly and emotion is high. A trading plan helps drown out the noise caused by sudden gains/losses, rumors, or the latest FUD circulating the cryptosphere. 

A well-devised trading plan should outline your trading objectives, the kinds of trades you want to make, your trading objectives, and the optimal conditions for trading. Determining your risk profile and trading style will help you establish what your limits are, and it's important to create a plan that you feel is within your ability to stick to when the market gets intense. 

Some other common features to include in your trading plan are: 

  • Entry and exit prices for specific trades
  • Stop loss and take profit levels
  • How much leverage to use, if any at all
  • Your crypto asset allocation
  • Maximum losses
  • The products or assets you trade
  • Maximum investment amount as a percentage of total capital
  • Portfolio diversification
  • When to stop trading (time, volume, etc.)

Secure Your Trading Account and Wallet

The first thing you should do before you start trading is secure your account. It doesn’t matter how much effort you put into trading responsibly if your account, funds, and passwords are compromised by a hacker. 

Common ways to secure your account include using two-factor authentication (2FA), creating a strong password, and whitelisting withdrawal addresses.

When using external crypto wallets, it's vital to remember that you should never share your private key or seed phrase with anyone, just like you wouldn’t share the combination to your safe or the details of your bank account. Hardware wallets provide the highest level of security when it comes to self-custody, but it’s important to remember that every wallet has its limitations. 

Use Stop-Limit Orders

Stop-limit orders are an essential tool for risk management as they automatically close a losing position, helping to minimize losses. With stop-limit orders, you don’t need to be on the trading screen 24/7 to manage your positions, allowing you to rest easy knowing your risk is minimized. 

With a stop-limit order, you want to leave a gap between the stop price and the limit price in order to give your stop-limit order the best chance of being filled. 

For example, if Bitcoin is trading at $20,000 and you want to sell it in the event of a market pullback, but don’t want any less than $15,000, you should set your stop price at $17,000. This way, if BTC price falls to or below that level, your limit order will be triggered. If you set your limit price to $15,000, your BTC will sell for $15,000 or better if the stop price is reached. 

Without leaving a gap, the market price could move below your limit price without filling your order. It’s important to note that a stop-limit order isn’t always guaranteed to fill as a volatile, fast-moving market can blow past a stop-limit in seconds with no available bids. 

Do Your Own Research

It’s always important to do your own research before you consider buying any asset to make sure that it's a legitimate investment that is worth your time and money. No matter what source provides you with information, it’s important to always validate and double-check any information you find. Before you start investing and trading, ensure you have a good understanding of where you're putting your money.

Diversify your portfolio

Included in a good trading plan is an approach to portfolio diversification that helps reduce your overall risk and maximize potential returns. Holding just one or two assets, or limiting your investments to just one sector or asset class is a riskier investment approach. This means adding exposure to other markets – such as real estate, precious metals, stocks, and bonds – to go along with your crypto portfolio. 

When it comes to diversification in crypto, you first need to define your asset allocation across the different sectors of the market. This includes DeFi liquidity pools, derivatives, tokenized securities, stablecoins, staking and altcoins, among others.  

By investing in multiple crypto sectors and limiting your exposure to one single crypto class, you are reducing your risk of experiencing big losses. 

Avoid FOMO

Remember that emotion bit mentioned earlier? Well, that would be the Fear of Missing Out (FOMO). 

FOMO is one of the most common feelings for traders in fast-moving crypto markets when a $1,000 investment can turn into $200,000 overnight. While the feeling is intense and alluring, it's also deceitful, and you would be wise to monitor how it affects your actions. 

FOMO can lead you to throw your trading plan in the trash and trade on gut feelings and rash judgments, which usually work against your long-term trading goals. Matters are further complicated by the vast amount of information available via the internet and the echo chamber that is social media and other common communication channels that convince you a token is going to moon in the near future and you don’t want to miss out. 

This is also a good time to reemphasize the importance of DYOR and make sure to keep an eye out for projects that shill or promise Guaranteed Returns! with every investment. Individuals with ulterior motives will promote their coins or projects, regardless of their actual value, and make lofty promises with the goal of securing your investment.  

Remember, there is always another opportunity in crypto, and if there’s a project that you really like that has already gone a big run, resist the FOMO, add it to your watch list, and wait for the inevitable check-back and consolidation to acquire it after the hype and price chasers have quieted down. 

Some common sources of FOMO to be mindful of include: 

  • Social Media - Companies pay influencers to promote their products, spread rumors and generate buzz.  
  • A winning streak of gains - Overconfidence can lead to reckless moves that result in a loss of previous gains. A series of wins can lead some to think that they can’t go wrong, which leads to a deviation from trading plans and, usually, lost funds.  
  • A series of losses that promotes “revenge trading” in an effort to make up for lost funds. 
  • Gossip and Rumors, which can’t be verified, but drive investors to start purchasing the token. This leads to a rapid price increase, which leads to more FOMO. This repeats until the momentum dissipates, and the price comes crashing down to reality. Remember, always DYOR. 
  • Volatility - Price fluctuations in either direction provide traders with the opportunity to make profits, but it's easy for a position to get out of control, especially when leverage is used. 

Understanding Leverage

Borrowing funds on margin or futures to make larger gains may sound attractive, but it comes with a great deal of risk that you should understand before utilizing. Trading on margin opens you to the risk of having your position liquidated, resulting in a total loss of capital, and in some instances, a hefty bill owed to your broker. 

For those who can stay within their limits, liquidations are to be expected, but not overly painful as the losses were predetermined to be acceptable. Losing more than you planned or risking too much money, however, isn’t responsible trading. Before you start using leverage, make sure you understand exactly how it works.

For example, using 10x leverage with a starting capital of $10,000 will give you $100,000 to trade with, but it's important to remember that your initial capital is used to cover your losses, so once that capital runs out due to a losing position, the exchange will liquidate your holdings. 

Use a Cooling-off Period

One method employed by traders to help use leverage responsibly is the implementation of a cooling-off period that helps you step away from the emotion of trading, enabling you to safely trade crypto within your means and stick to your trading plan. 

How long a cooling-off period is depends on each individual trader, but it is something that should be determined early on and included as part of a thorough trading plan. 

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