Opinion: To make money on bitcoin and blockchain, learn how to trade
Some investors have figured out that they can make a killing trading blockchain-related news.
The trading can be done with bitcoin BTCUSD, +1.66% and other cryptocurrencies, or companies such as Overstock.com OSTK, +1.18% AMD AMD, -1.89% and CME CME, +0.02% Some companies have been hyping blockchain, such as Marathon Patent Group MARA, +12.65% DPW Holding DPW, -6.76% and Riot Blockchain RIOT, +2.90%
In spite of the opportunities, many investors are complaining that the losses on some trades are exceeding their profits on other trades. They’re blaming this on the market hitting their stops and then running the stock, getting out too early, a gain turning into a loss and so on.
My motivation in writing this column is to help investors who see the opportunities to make money but in practice are not able to be consistently profitable. I will answer frequently asked questions. To make it easy to learn, let us start with two real examples of how to trade blockchain and bitcoin stocks correctly.
Two real examples
Please click here to see the annotated chart of The Arora Report trade on Square SQ, -2.10% In the interest of transparency, this is exactly the same chart that was published in “Ride the bitcoin wave with these 11 cryptocurrency-related stocks.” The annotations on the chart and the foregoing link describe how and when the trade was entered, stops placed and exited. The additional information that was available to The Arora Report subscribers was the position size, how to exit in tranches, various zones and Arora Trade Management Guidelines.
Please click here to see the annotated chart of Kodak KODK, +7.48% For the sake of complete transparency, this is the same chart that was published in “Kodak’s monster gains show there’s a killing to be made by trading blockchain news.” Annotations on the chart and the foregoing link describe how and when the trade was entered, stops placed and exited.
The Kodak chart was published while the trade was still in progress. Important new information was subsequently provided to The Arora Report subscribers for taking profits on the trade and exiting the position.
In the early morning in pre-market on Jan. 11, we told The Arora Report subscribers to take profits and exit the trade with the exception of those who were very nimble and experienced. For those who were nimble and experienced, the call was to tighten the stops to protect profits.
Here is how the sell signal was explained: “Both KODK and Global Blockchain Technologies BLKCF, -5.30% are likely to be highly correlated to bitcoin. In simple English, they are likely to move with bitcoin. Bitcoin is tanking on a report that South Korea may ban bitcoin trading on exchanges. If the report is true (the report has credibility), the risk in KODK and BLKCF has significantly increased.” (Global Blockchain Technologies is the lead investor in KodakCoin, in which The Arora Report also had a position.)
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
Frequently asked questions
Q: What can be done about stops hitting before the stock runs?
A: These are highly volatile stocks. Traders can take the following steps:
• Think of stops in terms of a zone, not a single point.
• In the stop zone, put several stops on several tranches.
• Hunt-and-destroy algorithms are often active in the market. Consider not putting stops where it is obvious to professionals.
• Use wider stops.
• Stops are only your second line of defense.
Q: What is the first line of defense?
A: The first line of defense is the position size.
Q: Why does the market always do this to me? (Stock runs after I get out, my stops hit, my order did not fill, and so on.)
A: Consider changing you mind set. The market does not do anything to you. The market doesn’t even know that you exist.
Q: What can be done about this great investment that is now a loss?
A: Look at a vast majority of bitcoin- and blockchain-related companies as a trade, not an investment. Your plan ought to be to hold it for a short time and take profits.
Q: What can be done about stocks running after I get out?
A: Consider the following steps.
• At the time of entering the trade, have a first target and, when appropriate, a second target.
• Think of targets in terms of zones, not a single point.
• Scale out instead of getting out at one time.
• Raise stops to protect profits.
Q: What indicators should I use on the chart?
A: This is a complex subject, and it will take a book to answer the question. The most important tip is to avoid redundant indicators. For example, RSI (relative strength index) and stochastics are redundant in many situations.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. All recommended positions are reviewed daily at The Arora Report.
Nigam Arora is an investor, engineer and nuclear physicist by background, has founded two Inc. 500 fastest-growing companies, is the developer of the adaptive ZYX Global Multi Asset Allocation Model and the ZYX Change Method to profit from change in trading and investing. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at [email protected]