When Dogecoin, a meme cryptocurrency recently pumped 1000% in a day, many people thought they were buying into riches. They heard the call of “Doge to $1” and got their hands on as many doggy stocks as they could.
However, as many people have had to learn the hard and expensive way, they were really buying into nothing more than a classic pump and dump, which would soon come crashing down like a house of cards.
While it hasn’t ended for many with the Lambos and trip to the moon they were after. It has, however, shown a perfect example of how not to trade.
If you stick with me, the remainder of this article will explore three valuable lessons we can learn from this market action. Here we go.
1. Don’t Trade Without a Plan.
Warren Buffett once said, “An idiot with a plan can beat a genius without a plan.” Similarly, Benjamin Franklin has said, “If you fail to plan, you are planning to fail.”
Many people who bought Dogecoin in the past couple of days had not heard of the cryptocurrency until they saw the cries of “Buy Doge” all over social media, at which point they immediately hit ‘buy.’
This is a prime example of trading without a plan. Instead, it’s trading with a wish and hope. It’s hoping you’re going to make money with no plan on where you’re actually going to take profits or cut losses. Hence, it’s basically setting yourself up for failure.
On the flip side, a successful trade would have a well thought out plan ahead of time. You’d know your entries, stop loss and take profit zones all before you took the trade.
A successful trade is then not necessarily about making profit but simply following your plan. If you get stopped out for a loss, that should still be considered a win, as it was all part of your plan and risk management.
2. Don’t Trade Your Emotions, Trade the Chart.
When an asset has pumped, say 700% in a day, you might start to believe the kids on social media and think it is going to a dollar. However, in the case of Doge, the chart would tell you a different story.
As you can see on the Doge/BTC chart, it’s got a long history of being used for pump and dumps, and any time it goes up, it comes down just as quickly.
In the example above, your emotions may have told you to FOMO in at 120 Sats. However, the chart shows any entry beyond 107 Sats is really nothing more than a gamble.
So, rather than chasing the pump and trading based upon your emotions, focus on finding good setups and trade based upon the chart and a plan.
For example, a good entry in this case was anywhere from the bottom at 15 Sats to the breakout of the downtrend at 40 Sats. Take profits should have been at 84 Sats, 107 and 188.
If you trade in this way, it’s not hard to see that your chances of making a profit significantly increase.
3. Don’t Blindly Follow Other People’s Calls.
The recent Dogecoin action is the absolute pinnacle of what George S. Clason meant when he wrote in his book, The Richest Man in Babylon,
“Advice is one thing that is freely given away, but watch that you take only what is worth having. He who takes advice about his savings from one who is inexperienced in such matters, shall pay with his savings for proving the falsity of their opinions.”
Thomas Tusser had similarly said, “A fool and his money are soon parted.” The way to consistently make money in the stock or crypto markets is not to follow where everyone else is going but to find the hidden opportunities so that everyone eventually comes to you.
For example, very few people a month ago were talking about the fact Doge was accumulating in a range where it’s typically pumped from. However, if you’d spotted and caught that, you could have ridden a +1000% move.
Of course, a strategy like this would take a bit more time and patience. However, that’s ultimately a rule of the game. As Warren Buffet has said,
“The stock market is a device for transferring money from the impatient to the patient.”