Market Thoughts #1 - (25-Sep-2022)

Crypto market risk management.

Introduction:

For the past few months I’ve been releasing a lot of content on my twitter that reflect my ideas and approach to the markets.

I am also enjoying sharing that content as it helps me structure my ideas in a concise manner.

After seeing that people enjoy my content, for whatever reason, I’ve decided to write at least once a week, a longer-format article here at Substack.

The goal is to try, perhaps, help people with my experience on how to approach markets and avoid falling into dangerous pitfalls that many traders do fall.

So let’s start this week’s article with the topic of risk management.

Thoughts:

Above this line is a Bitcoin chart. I have presented this chart to guide my thoughts forward. I am not writing from a script so I’ll be going through my ideas with you in this article.

A large number of big accounts on “CT” (crypto twitter) have been incentivising their followers to buy the dip since 69k. They are not real traders, they got lucky in periods of extreme expansion of prices and caught a regime that being long meant that you were correct most of the times.

These traders don’t understand that there are different regimes in the market and that a trader must adapt to these regimes or catch him/herself holding a bag.

As a trader your only goal is to manage risk better than just buy and hold. That’s your only goal. If an asset like BTC has drawdowns of over 80% and if in your trading practises you have drawdowns of over 80% , your trading activities are not better than just a simple buy and hold.

Your goal as a trader is to minimize the risks inherent to a buy and hold approach, risks such as what happened to LUNA. Many traders thought that LUNA was the future somehow, and now they have lost all of their investments. That is what you must avoid as a trader, the risk exposure of volatile unreliable assets.

I am not talking here about long-term investments of large , historically reliable assets such as the S&P500, real estate, etc.

The question now is:

• How do you minimize drawdowns?

Let’s get into it. As a trader you must have a solid trading methodology, a system, in which you can rely to trade the markets. You must understand historical performance and that way make sure that your risk is adjusted to the past performance of the assets you’re trading with.

In the example above you can see a simple breakout system that has worked quite reliably on Bitcoin since 2017.

That is what you need. A quantifiable way of approaching the markets, in which you can assess your performance going forward. If you are trading without a plan and methodology, you will feel lost and expose yourself to the ruthless nature of the markets.

If you have a solid methodology, you have a map to guide yourself forward. No map is perfect, and you may end up taking the wrong turn due to that imperfection, but you’ll eventually get to your destination.

A trading system is the same.

You don’t know exactly how the future will play out, but you know how it played out in the past. And you use that past performance as a guide to your future decisions.

When looking into investment material we always see the disclaimer that “past performance is not indicative of future returns” right?

That is a very true statement and protects investors from the unsettling truth that just because something has worked in the past, doesn’t mean that it will work in the future. But this also doesn’t mean that the past is irrelevant. Of course not. The best guide forward it to look at the past and make decisions based on past outcomes.

As a systems builder you have to build systems from a robustness perspective, so that you can ensure that your system can survive in the live environment. I’ve spoken about robustness on my twitter account, but I might write a detailed article here too on the matter

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Conclusion

This is what I want you to understand as a trader. You need to understand your trading strategy. If you don’t, you are exposing yourself to randomness and to the whims of your emotions.

If you are not trading from a logical perspective, you are not only damaging your portfolio, but also your mental capacity, as it takes a great deal from us to go through the struggles of being a trader.

Trade safe and always approach markets from a logical perspective!