Balancing out Risk and Reward

Dear Readers,

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So here we are in the ‘doldrums’ with the memory of a previous exciting bull market starting to fade on us. The challenge is not to let sentiment eclipse reason, but to rather see the slump as an opportunity for making profit going forward. The crucial component in this equation is of course patience. Just as in warfare, so too in the marketplace, 90% of the time consists in sheer boredom. It is [rational] discipline in both arenas that most often separates the victors from the vanquished. This article will take a particular look at the ETH/ USD trade insofar as it presents an opportunity to take profits whilst also remaining long that core BTC position. To continue the analogy, BTC functions as the reserves, whilst a particular trade functions as a strike into ‘enemy territory’ in order to secure a more strategic advantage [the accumulation of profits to counter-balance core Crypto].

In projecting a price target my aim is not to whip up flagging sentiment by giving an astronomical one. This would only serve to feed into sentiment and emotion. Rather, my aim is to provide a technical target that is realistic and indeed conservative. The point being to sketch a level where it would be reasonable to start averaging out of a position in order to realize profit. I think near all of us are only too familiar with the phenomenon of not taking profits from advantageous positions and missing the peaks… as we imagined them to be the mere foothills of further peaks. And so to the chart.

First of, a comparison of the previous two bull markets and their corrections. The current correction has shown a lapse of time commensurate with the previous. Markedly different though is a more subdued volatility this time round… as you’d expect in a maturing market. Where the first bull market saw a 50% correction of the run-up, the second saw a correction of only 38%. Once again, symptomatic of a maturing market.

Next we observe the diminishing return on the bull markets - a 201x compared to a 47x. Given this, we can expect that the previous 47x to be diminished somewhat in a future bull market, which brings us to the following chart.

Here the fib measuring the correction has been taken off the chart to be replaced by a fib extension that measures the subsequent peak as relative to the previous move up. Notice that the first peak bears to the second a ratio of 78%. This ratio can then be utilized to give a technical target of a possible future peak around the $15,000 mark. Add to this that 15K also lines up with a 3.2x return that is the same of the previous peak to peak [as per below], and you have a target of some technical interest.

Of course, such a technical target can not definitively rule out either higher prices than that of 15K, or, for that matter, no higher prices than the previous peak at all. This is because technical targets do not provide certainty but possibility and probability, which is to say that the word technical should be unashamedly considered as synonymous with speculation [reinforced by the same name we give to investing and trading]. The real significance of this technical target is better appreciated, in my opinion, when combined with a larger strategy [TA without strategy is empty; strategy without TA is blind]. As mentioned in the opening, it provides a realistic price level at which one could secure profits whilst remaining long BTC. This brings me to the final chart.

Of course, it is natural to be very cautious at the bottom of a bear market, and to ask of price to prove itself by making a grand gesture such as the breaking out of the ascending triangle that has formed over the medium-term. And this is fine, but notice the radical difference involved if one were to have entered at the bottom [if it is indeed the bottom] or if one waited for that breakout - the difference between a 13x and a 6x, or in other words, less than half the profit.

Naturally, sentiment dictates the more cautious approach, and no doubt such an approach can be integrated into an overall strategy; however, rationally, the technicals [as given above] would dictate that a more speculative approach should also be entertained insofar as we are looking to actually take profits.

Remember, sensible speculation involves balancing out risk and reward [risk-taking and profit-taking], for the sole point of speculation is to better our material circumstances, a point that can be easily lost if we don’t keep the rationale for speculation in sight. The reality is that all of us that are involved in this space are speculators of one kind or another, maximalists included, and hence why a trade such as ETH/ USD should well be considered. Yes, on the one hand it is speculative, where you are looking to make and take profits; yet on the other, when considered strategically, it can also be a form of risk management, where the entry and exit on that trade is a hedge on your core BTC.

Until next time,

Stay, relatively, safe out there,

Dave the Wave.