I constantly read through the Crypto forums and Facebook pages and all I hear is “Everyone HODL”. Although I love the acronym and I don’t believe in selling out of fear, I think that a lot of people are missing the point. I want to explain how you can actually be more profitable by trading rather than holding. I might be going against popular belief here, but this is how I trade. I have been extremely successful this way and I want to prove my point.
The HODL Mentality
What percent return do you want in a year? What is your goal? You are probably thinking of a number and I want you to put everything into perspective. In finance, if you are able to make a 10-20% return per year you are absolutely killing it. The average Hedge Fund does not make more than a 7% return (yeah the “smartest” people in the world working with the richest people aren’t even able to bring in more than 10% on average).
With all of that in mind, all of these people are usually using the traditional buy and hold strategy. You buy a stock or a coin and then you hold onto it for a year. Yes, you may pick a winner and get a 20% return in a year. Hell, if you bought BTC years ago you may have 100x your money. Here is the thing, the odds of hitting a 50%,70%,200% return on a few coins is extremely slim. There are not many times that coins jump like that. Honestly, I think that you are basically gambling hoping for gains like that.
(Before I get into this, I want you to understand that I am a conservative trader. I don’t expect crazy returns and I am not suggesting to go all in on any trade)
On the flip side, how often do coins go up 5-10%? For some coins, they are going up that much everyday or every week. I decided that I would test out setting sell orders at 5% gains. I used my algorithm to help me decide when to buy and then after I bought I would shoot for a 5% gain (I would subtract out trading fees so I was usually shooting for about a 6% gain).
If you were able to get a 5% gain each week, (this is EXTREMELY unlikely but I am using it as an example) and you invested $1000 USD as your original principal, you would have $12,040 by the end of the year. That is a 1104% gain in a year. Yeah, that 5% gain per week that did not seem scary at all allowed you to absolutely blow up your account.
There are a few things that I need to make clear. I am in no way saying that you could easily make that return. If it was easy, everybody would do it. My point is that it is easier to make a bunch of small gains and compound them together than to make huge gains buying and holding 1 coin. The odds of hitting an 1104% gain by buying Bitcoin or Ethereum is basically non-existent. The odds of trading them for a 5% gain per week is possible. You might miss out on big gains with this strategy but you really should not care. It is about your yearly gain. Charts go up and down and that 40% that your friends made could be pennies to you if you use my strategy.
So before you hate on my strategy, let’s put everything into perspective. If you used my strategy and traded 4 times per year, (assuming you hit your 5% gain and compounded your gains) you would hit a 20% gain for the year. That would blow away almost every hedge fund out there. Also, you would drastically reduce your risk because you would be only in the market for short periods of time. Flash crashes would be much less likely to affect you.