Meme Trading Guide: How to Avoid Complete Paper Profit Reversal

Author: INSIGHTFUL

Compiled by: Deep Tide TechFlow

Introduction

In this bull market, meme tokens continue to attract significant attention, with ordinary investors believing this is their only chance for success in this cycle. While the potential returns are enormous, the corresponding risks cannot be overlooked.

This article aims to help you formulate trading rules and profit strategies to increase the likelihood of making a profit, rather than completely giving back all paper gains while waiting for the next 100x return.

Reasons for the Popularity of Meme Tokens

Meme is the most genuine and straightforward expression in cryptocurrency. Traditionally, memes are closely associated with retail traders, but this cycle has not seen a full return of retail investors. Nevertheless, the attention on memes is higher than ever in the early stages of this cycle.

Currently, the market is dominated by experienced crypto traders, many of whom are in their second or subsequent cycles. Current market participants typically:

• Focus on maximizing profits.

• Recognize that over 90% of "fundamental" projects are actually memes, lacking real value and destined to fail.

• We see many examples indicating:

• The significant wealth creation potential of memes.

• Several billion-dollar, venture capital-backed "fundamental" projects slowly declining due to long unlocking periods.

Given these factors, it is understandable that many people tend to choose memes. They have proven to be powerful wealth creators without the false guise of "innovative technology."

PEPE and WIF rebounded strongly after a pullback last May, highlighting the changing perception of memes in this cycle. Unlike in the past, where the strength of memes often signaled market tops and peaks in trader confidence, today's memes show resilience during overall market pullbacks and periods of low confidence.

Large-cap memes like $PEPE and $WIF have almost become safe havens for users during uncertain times. The meme supercycle has clearly begun.

Risk Management: Position Size Relative to Portfolio

We categorize it into the following four categories:

• Four digits (1,000 to 9,000)

• Five digits (10,000 to 100,000)

• Six digits (100,000 to 900,000)

• Seven digits (1,000,000 to 9,000,000)

Trading with a Portfolio Below Four Digits

The million-dollar question is: "I have little capital, how can I succeed in shitcoins/memecoins?"

The honest answer is that the chances are very slim, especially for beginners. But here are some guiding principles to improve your chances of success:

• Firm investment: Allocate a significant portion of your portfolio to investments you have strong conviction and reasonable rationale for.

• Quick exits: Aim for 2-4x returns and exit quickly. Avoid holding too long when most of your investments are concentrated in one asset.

• Selective investing: Focus on logic and reason rather than charts and candlesticks. Invest 20-25% of your funds in one investment, taking enough risk to potentially exit this phase.

• Bull market opportunities: In a strong bull market with high risk appetite, narratives can drive successful investments.

Step One: Accept Reality

Understand that it is impossible to succeed overnight with small amounts like $100. Do not rely solely on cryptocurrency to cover living expenses. Treat cryptocurrency as a secret project, a skill you master behind the scenes.

Step Two: Master a Specific Area

With limited capital, focus on improving your trading skills rather than just making money. Accumulate capital until you can proficiently identify opportunities. Choose a niche (such as swing trading, small caps, mid caps, large caps) and study it in depth. Practice through simulated trading and accumulate capital through Web3 side hustles (like web development, community management, or graphic design).

Step Three: Start Trading with Savings Capital

Once you are confident in your trading skills and have accumulated some capital, start investing slowly. On Ethereum, if you can accurately identify opportunities, one ETH is enough. Be picky when trading, strictly manage profits, and cut losses quickly.

Step Four: Make Long-Term Investments

Once you have a solid portfolio, allocate a significant portion of funds to long-term promising projects. Hold the project until your conviction weakens. Even achieving 3-5x returns on a significant portion of your portfolio is quite substantial. While small investments in high-risk projects can yield large returns, the goal is to follow rational principles.

Portfolio Below Five Digits

If you have low five-digit funds, follow the same strategy as with a low four-digit portfolio, but reduce each trade's position size to 10-15%. Be extremely selective. With this capital, you can comfortably trade charts, buying at support and selling at resistance for major rising coins. As you approach high five digits, focus more on chart trading and closely monitor trading volume.

Portfolio Below Six Digits

Maintaining and expanding a six-digit portfolio is challenging. Your goal is to protect profits and deploy capital in valuable opportunities. The journey to seven digits will be slow and requires a commitment to the long-term process. If you can get in early, consider investing in new major rising coins. Compare the number of holders/market cap with recently performing coins to see if most people on Twitter are already following it.

Risk Management: How to Manage Trading Risks

• Set stop-loss conditions for each trade:

• Identify and mark key support levels on the chart. If the price hits these levels, stop-loss promptly and move on.

• Avoid letting assets depreciate to zero. Exit promptly if the trade does not go as expected.

• Invalid conditions may occur due to various factors, such as slowing trading volume, losing key support levels, or reasonable FUD.

• Plan exits in advance:

• Determine in advance where you will exit if the trade does not go as planned before entering the trade.

• Consider setting stop-losses for old coins based on your goals and risk tolerance. For new and volatile coins, you can adopt a "10x or bust" strategy.

• Monitor hype and sentiment:

• For meme tokens, pay attention to the hype and market sentiment on Telegram and Twitter.

• Assess overall market sentiment, paying special attention to major coins and their derivatives. If major coins decline, related coins may drop even more.

• Assess utility coins:

• For utility coins, monitor the development team's dynamics to ensure they continue to release updates.

• Look for upcoming catalysts that the market has yet to price in.

Examples of Poor Risk Management:

• Holding assets without timely profit-taking, leading to significant paper gains turning into losses.

Here are some specific examples:

Lost $4 million in profits.

A giant whale sold $JUP for $BODEN at the peak for $8 million, losing 98%, turning $8 million into $85,000.

Zooming out can help you gain a more comprehensive view.

Turned $9 into $40,000, then back down to about $1,600.

Elon Musk temporarily changed his Twitter avatar to laser eyes. While this was a strong catalyst, the price quickly dropped when he changed his avatar again. Things change very quickly, and usually, if you haven't taken profits in advance, you can't hedge at the best time.

Psychological Framework and Self-Questioning

• Reduce risk during price volatility:

• Take profits promptly during significant price fluctuations to reduce overall risk.

• Ask yourself if the people discussing the coin are known for pumping and dumping.

• Find out the reasons for the coin's rise:

• Identify the reasons for the coin's increase. Is it pure speculation, or is it related to developers of previously successful projects?

• Recognize that peaks are often marked by widespread hype from influencers or significant events (like being listed on Binance).

• If you feel excited and start taking screenshots, that might be a signal to sell.

• Gradual profit-taking:

• Regular profit-taking is crucial. What matters is the actual gains you retain, not just paper gains.

• Example strategy: Sell 25% at 3-4x returns to cover initial costs, then sell another 25% at every 2-3x return.

• Keep 10-20% of a "moon bag" to maintain your investment and avoid regret after selling.

Useful Principles

1. Learn from Mistakes:

• Personal experience is the best teacher in trading. The lessons learned from losses are invaluable.

• Advice about taking profits or checking contract addresses may not resonate fully until you make a mistake.

• The pain from mistakes will serve as a powerful warning for the future.

2. Value in Simplicity:

• Simple things are often overlooked because they don't seem complex enough.

• Observe the largest fluctuations during market rebounds to understand the most followed directions.

• For example, dollar-cost averaging into the well-performing $MOG in June and July 2024 shows sustained excellent performance.

• Identify holdings that performed poorly during market rebounds to adjust your focus.

3. Avoid Overtrading:

• Overtrading slowly drains your portfolio. Frequently changing positions reduces clarity of thought.

• Maintain discipline: Do your research, build conviction, choose positions, and stick to them.

• Learn to enjoy selling:

• Selling is psychologically harder than buying because you fear missing out on huge gains.

• Continuously taking profits is often more rewarding than waiting for unlikely returns.

• Holding a position daily is essentially choosing it over other potential opportunities.

4. Steady Gains Over Big Wins:

• Pursue multiple 3-5x returns rather than expecting 100x returns.

• Scenario #1: Holding out for 10-100x returns often leads to missing smaller but more stable profits.

• Scenario #2: Consistent 3-5x returns over time can compound significantly.

5. Avoid Re-entering Profitable Trades:

• After achieving 2-4x returns, close the position and wait for a pullback before considering re-entry.

• The excitement after a win can lead to overconfidence and positive bias, increasing the risk of losses.

• Removing the trade from your watchlist after closing helps avoid emotional re-entry.

6. Be Cautious of Trusting Your Emotions:

• In cryptocurrency, the right decisions often feel wrong. Selling during hype or buying during pullbacks may seem counterintuitive but can indeed lead to profits.

• Recognize that emotions like excitement and fear can mislead you, so decisions should be based on rational analysis.