With recent buoyancy added to volatility in the Crypto market of late, I thought it would be timely to review the principles of the swing trade [the shorter-term swing trade is to be contrasted to the longer-term position trade]. Within the larger context [of 'The Foolproof System of Trading' ]. This kind of trade has its own specific rationale. If at first appearance it seems a little mad, with this trade keen to sell just when much of the market is buying, rest-assured that there is method to this madness. This article will be the further elucidation of that method.
1] Not all Trades are Equal
As mentioned the swing trade is on a shorter time-frame than the longer term position trade [to be sold on the peak of the next bull market]. Given the principles of TA , I argue that the actual realization of TA prediction has a higher probability of the higher/ longer time-frame:
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.
2] A Good Enough Mentality, one less than ‘Optimal’
Within this conceptual framework, shorter-term volatility is less predictable than the longer-term analysis of trends. Accordingly, and pragmatically, the swing trade is a pure play on volatility. The optimal exit on an upward move will be difficult to time, with the decisive factor of selling being no doubt a previous target met. The realization [the locking in] then of the profit already made is always considered good enough. Here one would be perfectly prepared and fine with price going higher after selling given the near unpredictability of volatility in the shortest term. Of course, it should hardly be necessary to mention the contrarian [to sentiment] nature of this given the copious amount of articles written on this subject previously. However, the reader may object ‘But Dave, in selling aren’t you losing your positions that may lead to greater gains in the long term?’ To which the further following points apply.
3. The Swing Trade Hedges your Position Trades
As per the introduction, drawing a distinction between the shorter-term swing trade and the longer-term position trade is crucial here in what is a wider strategy. An individual trade is not taken isolated in itself, but considered in the larger context of your wider positions and exposure to Crypto in general. It now makes sense to sell a volatile trade at an opportune moment if you maintain exposure to the Crypto space in many other coins. Indeed, you should almost feel obliged to lighten up a little if you are currently over-weight in coins. Not only is the swing trade [short] a hedge against other trades where you remain long… insofar as these trades sit alongside one another, but they are, or also involve, a hedge in the more fundamental meaning of that word.
4. The Swing Trade as a Hedge in Itself
As longer-term readers of mine are familiar, I often refer to the uncertainty principle, and this principle being the most fundamental layer on which everything else rises.
For hedging is based on the uncertainty principle, and that is something that both Rationalism and Irrationalism, as [often unconscious] ideologies, or theaters of the mind, inoculates people against. We can now say that hedging first involves a recognition of the uncertainty principle, and that this principle is a natural attribute of someone not having subscribed [or capitulated] to some self-contained and apparently self-evident ideology. The ‘hedger’ is in fact an enlightened sceptic, wary of all certainties and ultimate explanations. Explanations might be true [and certainly useful at times], but they also might not be true. The hedge here involves a ‘negative capability’.
Yes, everything is uncertain no matter how much we’d like to be anesthetized against this fact. Though it’s a common trait of human nature to eschew the ‘cognitive dissonance’ that rises from this fact, and to look for ‘comfort’ in one or another pure and complete cognition, such as a model or theory that must be true, the trader is a realist that realizes the uncertainty principle is also the reality principle. No comforting illusions for him [which only really bolster irrational desires for instant riches]; rather, the thought that [logically speaking] everything could crash and burn in a market that is super-speculative is allowed to enter into calculations [consider it insurance]. When the going is good, the savvier breed of trader is going to skim of a bit of profit whilst he can…. and build a counter-balancing and present fund from the volatility of Crypto in contrast to those longer-term positions based on an envisaged ongoing bull market in the future. But Dave, the reader might object, what’s the point of accumulating a USD fund to counter-balance your Crypto longs when fiat is [or becoming] worth-less. To which a reply has already been made - a [dogmatic] theory is at play in this objection, which the uncertainty principle undermines. This brings us to the next point.
5] The Swing Trade Requires the Wearing of Another Hat
If one is simply wearing a BTC bull hat [maximalism] or a Crypto bull hat [those trading alt/ BTC] then the swing trade for the accumulation of USD will hardly be intelligible. What’s required here is a US dollar bull hat [shock, horror after all the hyper-inflation narratives]. The savvier trader here is resolutely pragmatic in his approach and not to be lulled into a ‘correct’ view of the market, the one that tends to capture new entrants and ‘retail’. With volatility being the nearest thing to certainty [whilst also being confident not certain in the ongoing bull market in Crypto] and in momentarily wearing that dollar bull hat, the trader will only be too happy to realize some profits on the volatility. Notice the ‘momentarily’ part - there is no either/ or here involved, where one must be either a dollar bull or a Crypto bull. One can be both, and yet I think this is the most difficult part for those that tend to think in more ‘ideological’ or theoretical terms. What we’re talking about here is a practical reason, dealing strategically with an unknowable world/ future, as opposed to theory where everything becomes wonderfully clear and distinct, if only in the theatre of our minds even as our real world positions get wrecked.
6] The Less Weighty Swing Trade
Often in the abstract, what gets lost is the weight of a particular trade. And often this makes all the difference, for the fully-hedged trader/ investor views the hedging swing trade as a riskier trade given the shorter-term volatility it is dealing with. And yet, paradoxically, these swings trades also mitigate another lower level of risk as a hedge against your long core and longer-term positions in Crypto. As mentioned earlier, where a more conservative investor might frown upon the riskier trade given the larger macro risk at play [see the 'Fool-proof System' ], this hedging trade becomes almost obligatory. The swing trades seek out the more volatile coins, i.e.; the ones more volatile to both sides. Each trade may be of a lesser weight [as opposed to the longer-term buys of the more major and less volatile coins]. Besides a lesser weight, there might also be more of them in order to spread the risk through various coins. Remember, the rationale of this trade is to re-accumulate a solid USD position [in your trading account] as a counter-balance to the value of your long Crypto trades.
Ideally, you’d have the value of both increasing at a similar balanced rate, where the longer-term trades in the more major alts would absorb the volatility… and the swing trades would take advantage of that volatility.
7] The Swing Trade Defuses an Over-valuation of Crypto
Just as it’s hard to buy at the bottom, it will no doubt be hard to sell at the top. And if recent experience is anything to go by, this principle has been well attested to at the recent top. With this in mind, in selling a portion of your Crypto in the swing trade you become accustomed to selling. At a later date, you’ll then be able to more easily average out of your positions at an opportune time. Of course, we all imagine that would be an easy thing to do, and yet most of us are aware also of how sentiment at its peak [not to mention the desire to maximize] can make selling most difficult. And of course, there is another tribe that looks only to evaluate their wealth in terms of Crypto, in term of what is only a form of liquidity in the form of digits on a screen. It does well for us to remember the functions of money and the difference between financial assets and real ones, lest we find ourselves laboring under that ultimate form of money illusion that prefers abstract riches to real ones.
A self-determined life [if freedom ever meant anything] must largely consist in extricating ourselves [yes, the responsibility is ours] from such illusions, and then having that power of money [for a power it is] restored to its proper function as a means to our own ends.
The ends being real assets to enjoy [and share] in the real world with money being the means to that end. The accumulation of a USD fund to off-set your long Crypto positions functions toward that end - profits are siphoned off Crypto into your USD fund, from which in turn funds are siphoned off into real assets.
It certainly helps to have in mind here some asset, whether a car, a boat, an apartment or a ranch, something of psychological value to yourself which can serve as an interim goal and reward for the amount of time and money you’re putting into this market, for otherwise you may well find yourself truly down the rabbit hole without a means of extrication.
It’s been my aim here to provide a reminder of what the swing trade is all about. When the context and strategy is lost, when a trade is taken in the abstract, a Crypto bull might get the wrong idea and interpret it as a bearish take on the market right when market sentiment is bullish. I’ve sought to outline the reasons for not only the desirability of the swing trade, but also the near obligatory aspect of it [given the entertaining of uncertainty]. It’s in the thinking through the wider implications and aspects that one acquires a more robust strategy in dealing with this market in my opinion. As we all know, the market is a ruthless one, and sometimes in turn the trader has to make some ruthless trades if to achieve the goals to which all this activity is aimed.