A Stoic Approach to Trading Crypto
Awareness is the difference between surviving and thriving.
A few months ago I wrote an article called #BUIDL a Legacy. Tune out the Price Wars in which I went into great detail about how you can improve your life and the lives of others by building things rather than just debating price. For those that spend the majority of their time trading these markets, rather than developing software, it might not have appealed to the crowds I was trying to reach. In this article I will attempt to show a different perspective towards approaching the risks that are inherent in the markets.
No matter how much force we try to apply to the markets, the only thing we really have control over are Perception, Action, and Will. Your level of self awareness and self control may have the greatest impact on the level of pain that the market dishes out. We deserve the pain we invite into our lives.
“People seem to avoid pain instinctively by building up mental defenses against the intrusion of environmental information that would confirm the existence of any conflict. These defenses consist of denials, rationalizations, and justifications — all of which will result in perceptual distortion.” ~ Mark Douglas, The Disciplined Trader
This market is a unique asset class, but it can actually be approached similarly to any other market in human history, as long as risk is defined first, not as an afterthought. It has many similarities to other boom/bust cycles i’ve seen while working at hedge funds, brokerages and developing risk analytics software for trading desks over the course of my career.
We barely had any trading activity between $3,000 and $5,000. In markets it is common to build a volume profile. It doesn’t matter how you explain it, or how many decades of experience you may have in markets, if you ask a thousand people for their interpretation of a chart, you’ll get hundreds of different interpretations. Some will agree with you, some will vilify you; really it does not matter. Spend your time and energy on things that will last the test of time. Everything else is ephemeral.
I fully envision a back and fill, bearish market all the way sub $5K. Many people say that is impossible and will never happen because of the massive new demand from millions of people. I say, “on the contrary”; the influx of latecomers is actually going to exacerbate the problem. Once again, this could be ultimately good for the bitcoin market — to wash out the weak hands who spent more than they could afford to lose near the top. Price is objective, not positive or negative. That’s not being a party pooper; it’s called being a student of the market and being cognizant of effective risk management.
There is another scenario that could occur, where Bitcoin continues to stand its ground. In a market among thousands of altcoins and tokens, BTC is really the best in breed. Bitcoin is likely the only store of value cryptocurrency liquid enough to be around in the next 10 years, so you might as well stop wasting energy even thinking about the others. 99% of alts & tokens will suffer liquidity crises so bad that you can’t even dump your own bags. If market sentiment is dragged down to the point where Alts are losing support and Bitcoin manages to stand its ground and remain above 5800, it will send a signal back to the market that participants are willing to defend it. That sign should be respected.
Stoics care not about controlling the market, and are open to exploring possibilities. It can be finally devastating for a trader to not consider all possibilities, and even rule out price movements that include even a smaller range than occurred in a similar time span.
The stoic finds price neither a downer or hopeful. They are comfortable with accepting the things outside their control. It just is. Price is ephemeral. Price is neither positive nor negative. People who are taking a cold, honest look at the market view price as this: objective. Finally, one person’s downer is another person’s hope. There really are a lot more people that would benefit from accumulating at lower prices than there are people who currently #HODL bitcoin from the early days. Just the facts. The market as a whole is indifferent to our individual feelings or interpretations.
Crypto markets don’t care about ‘muh fundamentals’. They care about liquidity and participant psychology, just like every market, since the dawn of time. Some dangerous phrases you will often hear include “institutional money is coming” or “there is so much venture capital money backing so many projects!” and “the prior low was clearly a capitulation bottom. We’ll never go below 16k … 14k .. 10k … 8k… 6k…”. Basing a trading decision based on a strong bias can be the most dangerous kind of trade, because the trader does not actually allow themself to be wrong in advance; you see, they have already mentally eliminated any possibility of being wrong, no matter the price.
Those that suffer the downturns with full and even dollar cost averaged positions more likely than not come out the other side worse because they are praying to break even during the months or even years of tumultious “sideways” action that preys on those beliefs. Meanwhile the patient and risk adjusted man will have time on his side. That behavior plays out in the charts, with every failed rally where people clearly have doubled or tripled down, trying to use clever techniques to average into a position and claw their way out of with ever-larger position size or leverage.
Always have a “Reverse Clause”
Before entering a trade, determine what price will negate your bias. This will help you from becoming a slave to your own ideology, stuck in a position outside of your control. If you don’t think about how you will exit a trade before entering, you will subject yourself to the torment of analysis paralysis when Crypto Winter comes. Preparedness and adaptiveness, combined with a willingness to accept a fate outside of your control actually places you in a position of strength. A trader’s inventory is his capital. Run out of inventory, and you’re out of business. Control your actions, and you control your risk.
Remember, even Satoshi himself considered the possibility that some day Bitcoin could have 0 transactions. Don’t #HODL onto a technological religious belief system stronger than it’s own creator, to the point where you blind yourself from possibilities that even its creator could see.
Perception, Action, and Will. The only things in our control.
At some point, if you’re serious about becoming a trader, you’ll want to take your audited returns to a proprietary trading firm and show them every single one of your statements, every execution, good or bad. They are going to go into their own independent audit and verify your trades. You will have to be consistent in your strategy with very little deviation. Next comes a line of questioning.
“Hi sir, I see you’ve started a trading business. Please, tell me about your trading strategy.”
“Well, I follow whichever way the wind blows based on a few people I follow on the internet”
The crypto space is also full of some of the most dogmatic characters and quotes that you will find in trading.
“You adapt to Bitcoin, Bitcoin doesn’t adapt to you.”
“Bitcoin can’t fall due to the hashpower of the network.”
Try replacing ‘Bitcoin’ with any other publicly traded commodity and ‘due to [x]’ with any other reason, and you can begin to understand that maximalism has morphed into something that is teetering on some new form of religion. While it is objectively true that anyone who has bought and held Bitcoin prior to 2017 has at least unrealized gains to this point, the far majority of participants do not fall in that category. Most people would not benefit by allowing a position to fall more than 20% against them, let alone 60% like has occurred during 2018 so far. No amount of stubbornness in view can bring back unrealized losses to a profitable position. Hell, even if you did #HODL Bitcoin from $400 all the way up to $19,000 — in no universe would it be considered responsible to allow the position to reverse 60–70% against you. Even if you continue to hold the asset, an unrealized loss is still a loss.
Alternative to panic is awareness and preparedness. If you had 21 BTC at 19.5K, your $409,000 #HODL is now worth $123,000. A Stoic Approach to Trading Crypto offers a more level headed way to manage risk.
Yes, I have been involved with Bitcoin markets for many years now, in addition to several other markets, so I have seen the prior 70–90% bear cycles in the market in 2014, etc. I am aware that we have seen rallies of several hundreds of percent, but history is also not a guarantee of future performance. Even the most prominent and mighty can fall. Being right in the past does not automaticallly mean that history will repeat and bail everyone out of their positions again. A lack of willingness to accept that possibility could force people into a state of forced awareness.
If you have suffered through several forced awarenesses, your perception of market activity will eventually become heavily weighted towards avoiding pain instead of seeking opportunity. Your fear of losing money, being wrong, or missing an opportunity will become your primary motivation to act or not act. The Disciplined Trader
Those who complain about why you’re not making money by following other people that are, then you gotta seriously reconsider if trading is for you. You’re currently not treating this as a business at all, unless your goal is to fail at it. You MUST develop a clearly definable trading strategy that is consistent. Every action you take should have rules for entering and exiting at time of trade. If you deviate from the strategy, you don’t have a strategy.
Measuring your risk adjusted rate of return and not just thinking about the returns. For example a position that moves against you 50% is disaster. Anything that’s allowed to move more than 10% can be arguably devastating as well. Write down all your trades from the strategy.
Even if you have a great strategy, it does NOT mean you will be profitable.
The art of successful trading/speculation includes the fact that most traders that survive the long term do NOT think in terms of short term movements; they have deep pockets and their lives don’t depend on the outcome of the trade.
I can recommend some additional reading, if you’re interested in getting a better understanding of Technical Analysis Using Multiple Timeframes, and combining those skills with Mental awareness in the markets. Finally, I recommend The Daily Stoic: 366 Meditations on Wisdom, Perseverance, and the Art of Living.
You can’t really determine what the market is likely to do next when you don’t even know what you will do next, regardless of what you may perceive or want. — The Disciplined Trader
Principles from The Disciplined Trader
The Mental Game is much different in the markets than in everyday life.
The Markets have no power or control over you.
You alone are responsible for your actions and reactions.
You must learn to control yourself.
You create the market you choose to trade.
You must develop your own rules… and follow them.
You must always be prepared… or face disaster.
While you cannot control the market, you can control your perception of it.
You must work on seeking opportunity, instead of trying to avoid pain.
In your attempts to avoid losses, you actually create them.
To be successful, you must develop self confidence and self trust.
Dan Emmons is the Blockchain Developer, owner of Emmonspired LLC, a Certified Bitcoin Professional, Certified Ethereum Developer, Full Stack Developer and Advisor on Cryptocurrency projects. He is also the creator of a Youtube Channel and iTunes Podcast called #ByteSizeBlockchain.
