A Middle Course between Investing and Trading: Part 1
And a Check on the Longer Term Trend
I thought it might be pertinent to cover in this week’s instalment the element of time. As covered in a foundational article, The Nature of TA - Objectivity , the more extended the time element of your analysis, the better your odds of identifying the trend.
But the reader may be left wondering how drawing a few lines on a chart could equate to an empirical science. To which I’d reply that the crucial factor here is time. If time were to be placed on a spectrum, with the shortest of periods at one end and the longest of periods at the other, randomness and possibility would belong to the shortest periods, while pattern and probability would belong to the longest periods. There would be varying degrees of probability/ randomness depending on what point of the spectrum you were dealing with - at the one end, minutes would be near completely random, at the other end, years would have a much higher degree of probability. Just as with any science, where momentary observations only start to make sense when accumulated into a mass over a longer period of time, so too with TA. It applies most effectively to longer time frames, where lines might be drawn, and trends discerned.
This is all within limits of course, for there has to be some point at which you could say your analysis would be invalidated. This, what I call rational and critical TA, avoids the pitfalls of an impatient human nature on the one side, and an entrenched dogmatic approach on the other. We always have before us a useful theory, lucrative if it pays off while fully hedged if it does not.
Trading Contra Investing
What trading loses in terms of risk [high risk] it makes up with in time [the realization of potential profit more immediately]. Investment, on the other hand, near always involves delayed gratification of that desire to realize profit. Whereas investment becomes a more sure bet [if there ever were on], relying as it does on the longer term trend or fundamentals, trading seeks to secure profits more readily at the cost of heightened risk [the risk/ reward ratio]. Yet what if the investor/ trader could find some instrument, which could combine both the reduced risk-taking of investment with the profit-taking of trading that operates on a more compressed time-line? I think Crypto-currency could well be that instrument.
Given the lengthier time period allows for a higher probability, we come to a curiosity in the Crypto world, which also tends to operate on a vastly shorter time-frame than traditional investments. Given a multi-year time horizon for a ‘position’ trade, this could well be considered an ‘investment’ as comparable to shorter term swing trades… and dare I mention day trades. Effectively, the [longer-term position] trade has also become an investment, and you could say this is where the concepts of investing and trading in traditional world of finance [decade, or even multi-decade] near merge in the world of Crypto [multi-year ‘trade’ come investment]. Where the shorter-term swing trade [multi-month, the trade proper in the Crypto world], looks to profit from shorter-term volatility, the longer-term position trade come investment looks to profit from the long-term trend thought to underlie the volatility in the interim/ on the shorter time-frame. To use COTI/ USD as an example of both the swing trade and the position trade:
Here a 5x profit was taken on the swing trade at the sell [given the previous history]. This could have been considered a solid trade and end of story, but the position trader/ investor, on a longer time-frame, is also interested in the long-term trend, and the possibility of those very large exponential returns, and so those funds raised in the swing trade were then put back to work on the second buy at a 50% discount and for the longer term. This kind of trade also hedges against lower prices as the initial entry level has now been effectively lowered 50% down to 0.045. the main point here is to illustrate the difference between the swing trade proper and the position ‘trade’, between trading and multi-year investing in Crypto. Given the strategy involved in the 'Fool-Proof System of Trading', swing trades for the accumulation of USD, as a counter-balance to your long Crypto positions, are just as likely to be pure swing trades as opposed to this kind of ‘double up’ trade, which can be difficult to secure. Having covered the difference in kind of the swing trade to the position trade/ investment, it’s now time to focus on that longer term investment.
As concepts are all relative, and as I’ve depicted previously the idea of a multi-year position trade in Crypto as akin to investment, so too one could consider core Crypto, the core-hold for a decade or so, investment proper. Once again, as along the lines of the ‘Fool-Proof System if Trading’, I consider most of my BTC my core holding in Crypto. The trading of the more volatile alt coins, both swing and position [near investment] functions as a hedge to that core, where profits are to be taken in both the short [swing] and longer/ multi-year term [position/ ‘investment’']. And so a focus here on that multi-year trade come ‘investment’ in major alt coins, and an assessment as to how that investment is currently performing [or would be if you’d staked positions earlier]. I’ll take ETH, ADA and LINK as my examples.
The long-term/ multi-year trend in ETH still looks solid. Even if [ a big if] it capitulated another 50% in nominal terms from the current price, it would only hit the lower tagged price and still remain clear of a 38% retracement. Investment thesis remains intact.
ADA/ USD likewise looks relatively solid from the perspective of a longer-term trend analysis [note: the green curves were drawn a couple of years back and have remained unchanged, and are meant to function as a mean of prices]. Even if [once again, a big if] price capitulated a nominal 50%, it would retrace just below the 38% level… where you’d be looking for a relatively quick recovery insofar as you were confident in the longer term projection [it should go without saying that as you’d not be certain but confident, you’d also be hedged against this].