Why it's a bad idea to jump into coins that just rose 100%
Cryptocurrency trading is a super-exciting activity, with potentially lifechanging effects. And these past weeks it has been very easy to increase your holdings. Everything went up, with many coins going 100,200, 300%, heck some coins went up 3000 % in a matter of one or two weeks. It seems like no matter what price you bought in, there would always be a time where you could sell higher. I write this post to warn the newcommers (as well as welcome them) of the dangers of buying coins that already went up alot. Chasing / buying into green candles, is what it's called.
So in these past weeks, anyone chasing green candles could have made some really nice gains and is probably proud of their 'decisions'. And I get it: some people warned you not to do it, but you decided to follow your own instinct and it paid off. That feels great! You sure showed them. But well, I don't want you to get used to it, because price doesn't always go up. Allow me to illustrate this with a few simple examples.
Let's take the chart of OmiseGO (OMG). This, according to many, is a very good company to invest in. Solid product, top notch team, they're in the Ethereum Enterprise Alliance and many people believe investing in OMG is an excellent choice. And, I agree. But let's watch what happened to the price action:
As you can see, it had a great run up! And it's a great coin fundamentally so there is nothing wrong with it going up so much in my opinion. But what if you bought at the top? Back then it was only worth about 13-14$ at the top, if memory serves me well, and people were talking about omg going to 100$ or even 800$ in the long term.
Before I get to my point, allow me to share another chart, this time NEO. Again, NEO, marketed as the Chinese competitor to Ethereum. Great coin, great investment, nothing wrong with it right? Well, again look at the chart:
The point here is that while great companies/coins might have spectacular rises, but they all come down to correct itself. None of these coins are close to being fully developed or deployed. Right now, it's all speculation, and with speculation comes natural price movement which means: whatever goes up, must come down. Granted, that in crypto, gravity seems to be less powerful, but the basic idea of not buying at the top still remains. Even though you might have made money doing this, let me show you why it's such a bad trade to make under normal circumstances:
Each trade, you have a risk of the price going down, and a chance of it going up. How much it can go up and how much it can go down is what determines the risk/reward ratio. If you buy a coin that is valued very low on the charts, but you think it has good potential and some good updates/hype incomming, then the risk you take is very small, while the upside is very high. The opposite is true if you buy coins like Verge, Ripple, Cardano, you name it. In fact, let's turn to Verge:
Plenty of people bought in after it already rose 2300%, thinking it could easily go x10 after that price. I just took this price point randomly btw, but pick any point you like, and the same idea applies. But no, whatever goes up, must come down. It 'only' went up 30% after that point, which makes the 2300% gain in 11 days become a 2900% in 12 days. Do you really think this price movement can sustain itself? No, at some point people realize it can't, so they sell and now those who bought the top are left in loss, or worse, they decided to hold it now. In a few months they will realise that Verge is now even lower than it is now and that they've lost a f-ton of money.
Moral of the story: before you entere a trade, look at the risk/reward ratio. It must be ATLEAST 1-2, though most traders go by 1-3. That means that the potential upside must be 3 times as much as the potential downside. Now let's view one more chart and see if you have learned something by now:
Ripple (XRP):
