"So, what was your risk reward ratio, again?"

That's the question that I can't help but be asking constantly these days when I see the sad news about people's life savings being wiped out in the ongoing cryptocrash. And, I am afraid, this is not the last of such events in the upcoming months.  

I genuinely thought that Bitcoin was very speculative, and I have said things to this effect a number of times either on this site or on my blog in the pretty recent past, but I have had no idea that people would think that something like Terra Luna was a better choice. 

No, if Bitcoin was very speculative, then, as I said in my very recent tweet, Terra Luna was stupidly speculative. So no, no way it was a better choice! In what respect?! 

I see none, except being still cheaper than Bitcoin (well, now it's even cheaper, but I see no rush of buyers) and perhaps a temporary novelty value, but that's not going to last because it seems to be easy to come up with this sort of novelty "values", which are values only for suckers. Those producing such "values" know only too well an old adage about a sucker being born every minute and profit from it handsomely.

Terra Luna is in the news at the time I am writing this (or rather started doing so - mid of May 2022) because it has collapsed overnight some 90+ percent of its (previous) value that the poor suckers who bought into it thought would only grow. Well, investments fluctuate in value, provided they have some (the value thing) to begin with. I mean, an iota of what could be called an intrinsic value, something that stocks of many reputable companies certainly have. 

The value perceived by the crowd can be anything, and the more speculative an asset is, the more diverse opinions about its value are. Hence, wild fluctuations in its price that try to accommodate most of these opinions (perceptions) even if briefly. Guess what? The "actually" perceived value of the Terra Luna crypto-whatever-it-meant-to-be turned out to be not so great after all.

Let me then review some investment basics here, as it is splendid even if rather unfortunate time to do so.

Perhaps the most important thing that an investor (or a trader) has to consider before putting on a position is the risk reward ratio (or the risk-to-reward ratio, to be more precise) of an investment (trade) that he is contemplating. To clarify, an investment is really a trade that you are willing to stay with for much longer than is ordinarily the case with a trade, and that usually means for years.  

The smaller this number (a lower risk versus a potential reward), the better, as this means you can benefit more with the same amount of money invested (risked). That's the type of trades or investments you should seek. That means that you are after relative bargains. 

Let me shamelessly add that my original US stock trading method guides you in this very direction (and as of this writing, it's only $75, which is a great bargain too). 

Needless to say, it is dangerous to jump into trading or even investing without some safe practice that would give you an idea of how much you can gain versus how much you can lose. You can do this even on paper, though this is a very limited experience as your money is not on the line. Trading or investing with small amounts of money takes it to another level.

The best starting point has traditionally been with mutual funds, although these days ETF's (that's Exchange Traded Funds) are also a good, low risk entry. These instruments will help you gauge your patience staying with positions that may not go your way quickly enough; believe me, it is not something that can be easily dismissed and it is really part of broader trading psychology. You may find out this way that you are really not cut out to be a trader or investor. 

Once you get the hang of this and feel comfortable with the idea of parking your money, where you may not always be able to access it or, perhaps even more importantly, losing some of these funds, then you are ready to take another step by trading or investing in more risky, if only because more highly leveraged, instruments such as futures (e-mini or e-micro, in particular) or Forex and doing it in smaller timeframes. Two popular such timeframes are day trading and swing trading.

Finally, if you crave irrational exuberance and have unbounded faith in new-fangled trading instruments that are yet to be regulated (unlike stocks or futures), then you may give cryptocurrencies, such Bitcoin, a shot. Be careful not to invest too much. Be even more careful not to limit your investment opportunities to this field. Stocks, bonds, or futures are still the most reasonable things to play with. Forex and then cryptos should be considered last.

Posted on June 5th, 2022.

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Last updated on September 19th, 2022.