bitcoin trading plan

DIY Investor - bitcoin trading plan

October has been a brutal month for stocks but thankfully we have sidestepped most of the carnage by taking our stops and not initiating new positions in this environment.  Since it looks like we are going to close the month out without a new 821x trade idea, I decided to briefly share my current bitcoin (and crypto) trading plan.  But first, a little background:

Last year, bitcoin skyrocketed from less than $800 to nearly $20,000 and made a lot of people very rich.  Many of these folks have recently taken up residence in Puerto Rico for the same reason I did over 3 years ago; to take advantage of the generous tax incentives available here.  Lately, I’ve even started seeing some of these crypto-traders moving into my neck of the woods, here in far western Puerto Rico.  They are passionate about crypto-currencies and want to position themselves to take full advantage of a potential round two of profits.

Although I participated in some of the move in bitcoin last year via the Bitcoin Investment Trust (ticker GBTC), I ultimately found GBTC to be less than ideal.  It can trade at a hefty premium over the underlying price of bitcoin when bitcoin is rising and then have all the premium quickly evaporate when the price is falling.  This makes it difficult to capture profits when a sell signal flashes.

My dissatisfaction with GBTC along with seeing these newly rich crypto-traders moving to town prompted me to finally go ahead and open up an account at Coinbase.  Now that I can trade bitcoin and other crypto-currencies properly, it was time to come up with a plan.

bitcoin trading plan

Although my focus is primarily on bitcoin, I keep an eye on and trade all of the cryptocurrencies supported by Coinbase Pro.  Remember that while we all know that trading cryptos holds tremendous potential rewards, it is extremely high risk.  Frankly, you shouldn’t invest any more than you are willing to lose.  I think a good guideline is a tenth of your investible assets.  So if you have a trading account of $100,000, maybe transfer $10,000 to Coinbase for crypto.

Now, you could just apply the 821x trading system to bitcoin and get in and out based on standard buy and sell signals.  However, I think this approach would likely grind your account steadily down by forcing you to repeatedly sell at a loss because of the whipsaw moves bitcoin and other cryptocurrencies are prone to. 

Instead, what I suggest is to reduce your buy size to 75% of your planned position size on your first 821x buy signal and plan to not take stops unless your position is profitable.  Then, if the trade initially goes against you and you get a second buy signal at a lower price, go ahead and scale in with the remaining 25%.  In the example account above your first buy size would be at $750 and your second at $250 allowing you to average down a bit in case you didn’t quite get the inflection point right.

DIY Investor - bitcoin trading plan
four 821x buy signals so far this year and building energy for a move one way or another…

As far as selling, again, if I see an 821x sell signal and am NOT profitable (the price is not higher than my cost basis), then I don’t sell.  Because of this you should be prepared to see some of your crypto positions potentially go to zero.  That’s why we have to be extra conservative with position size.

However, if I see an 821x sell signal and am profitable, I sell half of my position to book gains.  Then, if going forward the price closes below the closing price on the day the sell signal occurs I sell the rest.

So that is my current bitcoin and crypto trading strategy in a nutshell.  If you are a crypto-trader, we would love to hear your trading plan in the comments!

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