Last week, we saw together the notions of stop-loss and take-profit, these sometimes magic, sometimes deadly tools. Today, we are going to talk about a more theoretical subject but just as important, if not more: portfolio management! Indeed, it is the latter that will allow you to hold in the long term in your trading activities of Bitcoin, crypto or any other financial asset of the rest. Come on, make yourself comfortable, with a hot chocolate-marshmallow, and off you go!
Before going into details, it would be good if we all agreed on the term Portfolio Management, no ?
Portfolio management is a concept often overlooked by amateur traders. Even worse, it is not known to them.
And somehow … I can understand. Indeed, when one discovers trading, the novice trader will tend to focus on the visible part of trading : thetechnical analysis.
Yes the picture is in English … but I think you will have understood it anyway! However, here is what is described above. Success in trading comes from :
- 15% of your trading methodology (technical analysis) and your talents to predict what will happen
- 35% of your risk management and your Portfolio Management !
- 50% of your disciplined, of control of your emotions and your patience
The novice trader often sees only the 15% that comes from the methodology and technical analysis … Ignoring the remaining 85%, and not understanding why it is not profitable.
It reminds me of a known trader (mea culpa, I forgot his name) who said this:
I could give you my exact trading strategy, you will not have the rigor to follow it. And you will therefore be losers.
It may sound violent at first… but terribly true. Have a trading strategy is essential!
But to be profitable, your strategy must be accompanied by the remaining 85%.
This is also one of the reasons why paying your favorite guru every month for sometimes questionable trading signals will not work for you …
Now that we have set foot in the dish, and that we have agreed on the importance of elements other than technical analysis, let’s move on to the concrete: what do we mean by Portfolio Management ?
This notion is most often applied to investing more than trading. Indeed, the longer you enter into the duration of an asset, the more important this management becomes.
So as much to tell you as a trader who makes scalping (trades that last between 10 seconds and 1 minute) will feel very little concerned by all this.
Let’s take an example to see more clearly … You have $ 900 to trade, and you decide to buy:
- BNB for $ 300 (exchange token Binance)
- HT for $ 300 (exchange token Huobi)
- KCS for $ 300 (exchange token KuCoin)
I’ll tell you right away, if the exchange market collapses, you may have substantial losses !
And this is exactly where the Portfolio Management. Its objective is to reduce the risk what does your capital incur over time, selecting the right assets.
The different axes to work
The previous example made it easy for you to understand what portfolio management was. However, there are several areas to watch in order to properly balance the latter.
The first criterion when building your portfolio is the cryptocurrency marketcap that you’re watching.
Indeed, an implicit but verified rule requires that the higher a cryptocurrency has a higher marketcap, the lower its associated risk.
So, to choose, would you have more confidence in Bitcoin (1st cryptocurrency in marketcap) or in Nimiq (198th cryptocurrency in marketcap)? If you had $ 1,000 to invest there, right now, now, and for 10 years, I think your choice would be quick.
Well, the same goes for all cryptocurrencies! We can therefore distinguish at least 3 major categories:
- High Marketcap (TOP 1 to 20)
- Medium Marketcap (TOP 20 to 100)
- Low Marketcap (TOP 100 and +)
Once these axes defined, you will have to take care not to have 100% of cryptocurrencies in your wallet coming from the same category.
And the more “High” cryptocurrencies you have, the lower your risk will be. It’s up to you to measure your risk apprehension.
A second important criterion will be the sector of your assets. This axis is also verified very well in traditional markets. Surely even better than in the cryptocurrency markets which are still young.
Have you ever heard of the biotech ? This is an area that has been hugely popular lately as promising and traders wanted a piece of the cake.
The problem is that tAll assets within this sector behaved identically :
- the sector was up, all the assets were up
- the sector was down, all assets were down
If all of your cryptocurrencies are in the same industry, then you are not diverse!
Yes, yes, I am diverse! I have no less than 10 different cryptocurrencies!
But if your 10 cryptocurrencies are exchange tokens, it is enough that these see their market collapse for your 10 trades to be losers at the same time.
In these cases, have 10 cryptocurrencies or 1 alone, it would have returned to the same. Besides, this perfectly introduces the last category: correlations !
I do not wish to discuss the exact definition of this term, nor its mathematical and purist meaning. So let’s agree right now on what we mean by correlation.
A correlation exists between two cryptocurrencies when the movements of one leads to movements of the other, or even that these movements are simultaneous. Well, that’s a good thing!
Some cryptocurrencies may be correlated. Most often, this correlation is only a result of factors seen previously (for example, all low cap cryptocurrencies will explode or lose value at the same time).
But there are also other wider correlations. Especially with the king of cryptocurrencies, I’m obviously talking about Bitcoin!
Indeed, you have already noticed, but if the latter has a violent fall, the whole altcoin market that falls with.
At most, if you know of correlations Between two cryptocurrencies, it is preferable to avoid of the select together.
Manage your Bitcoin trading portfolio
Composing the rules for your portfolio
Now that we have laid the foundations for portfolio management, the hard part remains to be done … Find the rules that suit you !
If you are not comfortable with your portfolio, you will not be confident with your trading … And the impact on your results will be immediate.
I have given you an example of portfolio allocation above. Let’s be clear, this is only one hypothesis among many, and it is not to be followed to the letter.
Personally, my Portfolio Management goes beyond simple trading.
here is a example Management :
- 50% in Long term HODL (5 to 10 years old)
- 30% in Medium term HODL (1 to 2 years)
- 15% in swing trading (Several weeks)
- 5% in scalping (seconds, minutes or even a day)
And inside these boxes, there are additional rules. For example, in the box Swing trading, the rules could be:
- 60% in top 10 cryptocurrencies in market cap
- 30% in top 25 cryptocurrencies in market cap
- 10% in top 100 or still unknown cryptocurrencies
While in the box Long term HODL, the rules would rather be:
- 80% Bitcoin
- 20% Ehereum
I remind you that all these portfolios are fictitious examples! Do not follow them to the letter stupidly.
Now it’s It’s your turn ! Take time, really, to ask these notions, and build up little by little your rules !
Manage portfolio evolution
It’s not all about having clear and defined rules for your portfolio … you then need to know the respect.
Your capital is brought to evolve regularly according to two factors:
- the money you reinvest regularly
- the results of each of your “boxes” (trading, hodling, etc.)
These two elements will inevitably influence the division of yours capital, and then it will be necessary to think about reallocate your cryptocurrencies.
An example will probably be more telling. You have defined your portfolio as follows:
- 80% long-term HODL with 100% Bitcoin
- 20% trading with 50% Ethereum and 50% Cardano
As of January 1, this is where you are:
- $ 800 Bitcoin
- $ 100 Ethereum
- $ 100 Cardano
All proportions are well respected, congratulations! Now, 1 month has passed, and it is February 1st. At that point, your pay drops and you buy $ 200 worth of Bitcoin. In addition, during the month of January, Ethereum exploded and saw its value double by two while the others remained stable.
So we have the following portfolio:
- $ 1000 Bitcoin
- $ 200 Ethereum
- $ 100 Cardano
And if we look in proportion … this gives us:
- 77% long-term HODL with 100% Bitcoin
- 23% trading with 66% Ethereum and 34% Cardano
Ouch, we’re starting to move away from our initial rules… But luckily, you’ve decided to do things right with your wallet! The serious and the rigor have taken over the excitement and the risk.
So you decide to sell some of your ethers to buy Bitcoin and Cardano. Just what it takes to to balance again the proportions…
This tenth Trading Grandstand ends here! I hope you have always liked it. I also hope that your reading will have confirmed the importance of having serious and healthy portfolio management! And if you didn’t know this concept, I hope you have learned enough to put it into practice today.
I know that notions outside of technical analysis often tend to be overlooked or even underestimated. Having a controlled risk or good portfolio management does not bring measurable results in the short term. However, these are the things that, in the long run, will make you a truly profitable trader!
For the eleventh chapter, we will continue in these intangible and yet essential notions… We will talk about the cheat code allowing everyone to become profitable… Risk management! And yes, I weigh my words with this hook worthy of a charlatan.
In any case, I hope you enjoy reading all of this, and that you will follow this Tribune carefully to the end!
See you next week !
Previous chapters of the Trading Grandstand:
Bitcoin, cryptocurrency and Blockchain influencer and popularizer. My goal: to make these complex concepts accessible with passion on a daily basis on my networks.