After you decide the approach of your strategy (read Triangle of Trading post), the next thing you must do is pick the right coin(s) to be traded. This is important because all coins aren’t behaving the same way. I will try to give a simple analogy to give better picture.
You are going to local market to buy some fruits. You will find different kinds of fruits there. There are some ripe fruits, but there are also some unripe or spoiled fruits. Just because a fruit is being sold doesn’t mean it’s worth buying. Some fruits might look ripe and appealing but are rotten inside, while others are too young and haven’t matured enough to be enjoyable or valuable.
Similarly, in the world of crypto, not all coins are good for trading. Some might have strong fundamentals and growth potential, like a perfectly ripe fruit, while others could be risky, overhyped, or lacking substance, much like fruit that looks good but is tasteless or spoiled.
For example, you shouldn’t trade game coins. Their volatility and movement aren’t consistent throughout the years and often driven by random promotional events. At some periods, their volatility would be good for trading (due to some promotional events involving them), but at other periods, they have no volatility at all for a long period.
So how to define which coins are good to be traded? One way to define it is by using their market cap ranks. Personally, I will advise you to trade only high market cap ranked coins. Low market cap coins are risky to be traded because they are more volatile and less liquid than higher market cap coins.
Imagine you’re at a small local market with only a few stalls, and you want to buy or sell a rare item. Since only a few people are trading this item, prices can change drastically with just one or two transactions. You might get a great deal, or you might end up paying much more than expected. Similarly, low market cap coins have fewer buyers and sellers, meaning a small trade can significantly impact their price, leading to wild swings and making them unpredictable and risky to be traded.
Moreover, these coins can be easily manipulated by whales, who can drive the price up or down quickly with (relatively) small efforts, which expose small traders like us with very big risk. In contrast, higher market cap coins, like Bitcoin or Ethereum, have more traders which make it harder to manipulate them.
My lecturer once said “Garbage in, garbage out”. No matter how good your cooking skill are, you won’t be able to make a decent meal out of rotten ingredients. You might already have a good strategy in your hand, but since you are exposing it to bad pairs, the result was bad and you blamed the strategy for it. You keep trying to fix the strategy, but the result were always bad. Maybe it’s not the strategy that needs to be fixed, but maybe you just need to give it a good pairlist.
Personally, I’m trading only Bitcoin pair for now, because it has the biggest market cap, and it dictate the movement of other coins. When Bitcoin is in sideways movement, all other coins tends to have independent movements of their own. But once Butcoin makes a big movement, all other coins will follow it, no matter what were their movements prior.
Coin A might be on upward trend, while coin B is on a downward trend. But once Bitcoin start to move down, coin A and coin B will both follow Bitcoin’s movement. Even Etherium will behave the same. It makes it harder to predict their movements because not only you need to learn about that coin’s movement, but you will need to predict Bitcoin’s movement as well.
My recommendation to you would be to trade only Bitcoin. But if you still can’t accept the one pair pairlist, then at least trade only high market cap ranked pairs. Freqtrade has MarketCapPairList plugin for that. Having a good pairlist makes the strategy development journey much easier and less stressful.
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