Strategies for Taking Profits

Dear Readers,

The Beach House | Cabin in Kent | Canopy & Stars

Given we can be quietly confident [though never certain] that the macro turnaround is in, naturally we begin to think about where, when and how we can take potential profits in the not-too-distant future. The difficulty though is that we naturally also want to maximize those profits, when realistically this may entail missing the top, which no doubt many have had experience of in the past.

The problematic, in real time, is that as price rises, so too does our exuberance for those investments and trades that we have made at lower prices. As price rises, we see the potential for ever higher prices and are hesitant to sell, to actually realize profits in the real as opposed to the digital world.

This article will seek to solve that problematic by outlining various strategies that can be employed in ensuring the taking of profit. These strategies have also been long-standing principles of mine in my approach to trading/ investing in the Crypto space, so will appear as also a review to some. Again, the strategies serve to enable the taking of profits at a time when it is extremely difficult to sell.

Establishing a Base

Having a solid base, a center, a ground floor for your trading/ investing operations enables one to take profits at a later date, and this is effectively a long-term core position/ investment in BTC. Think of this the heavy ‘keel’ and counter-balance, on the higher timeframe, to all the whip-sawing volatility you see above on the shorter timeframe. When all your liquid worth is swinging this way and that on the volatility, anxiety on the lows, and exuberance on the highs set in. Here, naturally, our emotions get the better of us, and we’re unable to make cool calculated rational decisions. Have a solid part of your liquid worth transferred instead to the less volatile and steadier appreciation in macro terms to BTC, and watch your anxiety levels reduce on the lows, and so too your fear of missing out on profits at the tops.

But Dave the reader objects, isn’t BTC itself extremely volatile? Yes, and no. Yes - relative to a traditional investment or a bank account balance; no - relative to the more volatile alts. It’s here a question of degree, and the timeframe involved. So for example, looking at the development of the LGC, which is reasonable to extrapolate into the future, one can see a steady appreciation [or capitalization] in the macro.

This is why I’ve always advocated first buying a core in BTC [preferably near the bottom of the channel] and just sitting on it for the longer term. Of course, when talking of that longer term, one’s time preference and age comes into play here. Given the establishment of an investment base at the lowest level, one can then begin to think of how to build a higher layer on top of that in order to take profits in the shorter-term [which would here equate more to the time-line that coincides with the popular conception of cycles].

Profit Taking on Position/ Cyclical Trades

Profit is made on volatility, buying low and selling high. And though BTC is volatile, alts are even more so. Alts then are the best vehicle for taking profits as they effectively ‘leverage’ the volatility of BTC/ USD. Of course, the natural partner to the volatility of alts is not BTC but USD [because more volatile], therefore the focus for the position/ cyclical position trade of alts has to be on the USD pairs. One is not here trying to increase a stack of BTC, for they already have a solid position, and can safely [always in relative and hedged terms] sit on it without engaging in risky exits and re-entries, without having to trade it. Besides, even if one managed to increase their BTC stack on trading against alts, they would not have really taken profits in the real world, their wealth would still be in digital/ abstract/ potential terms.

Rather, the trade is against the extra volatility as to be found in the USD pairs. This is because trades per se always seek out the highest volatility, and because profits are actualized in the selling, where those profits should ideally go into buying real assets in the real world [as per that shack on the beach] thereby increasing one’s actual wealth in material terms.

Here’s the scenario: after an extended base, after some initial modest local higher highs and lows being made, the market suddenly breaks out and goes manic. One’s positions trades have been established earlier on for just such an eventuality. Price starts spiking, and at some point, you’d be looking to layer out/ average out of those positions to realize potential [if sells are not triggered those profits only remain potential ones]. In this scenario, in real time, further potential profits are sacrificed for actual profits [where those profits would represent substantial enough gains for you, it helps to have the purchase of an assets in mind].

This is to fully recognize the reality principle which is also the uncertainty principle - you’ll never be able to pick the exact tops whilst also looking for a reasonable/ flexible range within which tops might occur, whilst also layering out over a period of time. Where those solely sitting in alts may find it very difficult to divest themselves of those alt positions [that are now over-valued both in the market and in the eye of the beholder, bubble-like], those with still a core BTC position will have the capacity to sell because in doing so, they would not become fully divested from the Crypto space.

What if a Manic Blow-off Top in Alts does not Eventuate?

Of course, the rational trader/ investor also has to have the capacity to think the very opposite of their main thesis, which is simply known as hedging. Given we can have some confidence by extrapolating the trend, we can in no way have certainty and hence the hedge. Say the blow-off top did not come, and instead we just continued to see a choppy sideward market in the macro, giving false hope each time. As mentioned earlier, the most certain thing in this market is volatility.

This is where a shorter-term trade comes into its own. This trade, a pure play on shorter-term volatility, is completely in the hedged USD accumulation camp. Here the investor is not only wearing his trader’s hat, but his USD hat at that. Given the ability to think the opposite, the antithesis, the now dollar bull looks to build a counter-balancing USD fund in his trading account. Come what may, imagine the worst of all outcomes for the Crypto space, he’ll still have something solid to show for his efforts, while also being in a position to skim off some profits along the way.

This counter-balancing of accumulating USD funds on shorter term swing trades, to complement the growing value of those longer-term position/ cyclical trades, should contribute to an increasing value in the trading account altogether. Just as the taking of potential profits on the position/ cyclical alt trades counter-balances and hedges the sitting on a core investment position in BTC, so too does the shorter-term swing trade counter-balance the longer-term position/ cyclical trades of major alts [in case those trades do not eventuate]. We then see a third layer added in our trading/ profit taking strategy at the top. Having discussed the theory/ the strategy, time now to look more practically at the charts. But back to our expectation for a spike in all Crypto.

A BTC/ USD Hypothetical

Of course, in discussing profit making in the future, hypothetical language always needs to be used. Neither certain nor random, there is the in-between of a probability to be entertained. Given the conservative/ realistic model of the LGC, and say price ran to the top the range doing a 3x from here, then naturally the question arises on how to take profits… for we can be relatively certain that on a spike there would be a subsequent correction. As mentioned earlier, I think the trader/ investor is better off just sitting on the core BTC…. while looking to take profits in the more volatile alts. While in the macro the real volatility of price is reducing, as price becomes increasingly stable with its increasing capitalization, the long-term investment thesis remains intact with very serious returns still to be potentially had as depicted in the chart below.

Sitting on that core BTC position then, one can turn their attention to the more volatile alts for a profit-taking strategy… insofar as one is incentivized to balance their liquid and potential wealth [money as the means] with the realization of wealth in building assets in the real world [the end].

How a BTC Price Spike Might Translate to ETH

My main thesis here is that alt/ USD pairs ‘leverage’ the volatility seen in BTC/ USD, both to the downside and, significantly here, to the upside. In order to portray this translation, I’ll first focus on ETH/ USD. If BTC is the King of Crypto, then surely ETH is the Queen. The aim here is to show how even a relatively conservative target for ETH [compared to its previous massive move in the last manic market] is a useful vessel by which to take profits. That said, other alt coins might even outperform ETH.

In the comparison of BTC and ETH above, you can see that ETH has kept up with BTC off the bottom, both have currently done a 4.3x. Given the previous outperform of ETH relative to BTC during the last bull market, it’s reasonable to think that ETH will also outperform BTC this time round… even if on not such an extravagent scale. The technical chart has a 4x target from here for ETH in comparison to BTC’s 3x. Given my entry [the orange arrow] this equates to a 13x from the low. A similar entry from the lows, the shaded ‘buyzone’ for BTC would give a 10x. Not a huge difference you might say, but there is here diversification in positions held that frees one up to sell something while also continuing to hold something else [core BTC]. Also, other alt positions may ‘leverage’ the upside volatility even further enabling one to take even better profits, while taking those profits will, psychologically speaking, by relatively easy given one’s continued exposure to core BTC at the ‘lower level’.

And finally to compare BTC with VET.

How a BTC Price Spike Might Translate to VET

The elephant in the room for alt traders is whether or not these alts will make new all-time-highs. There is another layer of speculation involved here [while arguably that speculation also involves some hedging where those alt trades are for the taking of profits in order to stay long core BTC]. If we look soberly/ technically at the VET chart, you really have to wonder whether higher prices will eventuate.

On the date line [Sep 2020], you can see a similar pattern - VET first takes off before pulling back before the parabolic move in BTC. On the [real] fib extension comparison, if the pattern held, a relatively modest target.. and falling short of those previous highs. From here, the trade in VET may be better [assuming the BTC target], but BTC would have outperformed off the bottom [12x to VET’s 10x]. This had me a little puzzled, but on factoring in radical volatility, for VET’s last plunge to the absolute depths in early 2020, I think an argument can be made, again a very speculative one, that that kind of volatility can be dis-counted to a certain extent. And so another chart to factor that in.

The new fib extension provides a more generous 7x target from here that reaches near new highs. On this basis, it would outperform BTC off the bottom [12x] by a 16x…. not the huge outperformance as previously, which is due perhaps to a maturing market. That said, there is still the potential to be had in using this huge volatility to your advantage by having a diverse trade/ investment over and above BTC to take solid profits in.

In sum, by having a strategy in place before markets get heated, you’ll be more effective in decision making in the heat of ‘battle’. While many disagree that future price development in alts will outperform that of BTC, and indeed will turn to the charts to substantiate their point, this misses a larger point - that what the hedged trader/ investor is focusing on here, and in the taking of profits in the shorter term, is the extra volatility in the interim that alts bring to the table. And when the focus is there, as opposed to looking at the abstract long-term performance of alts against BTC, as the arm-chair critic is like to do, who neither trades nor take profits, then alt volatility comes into its own.

Until next time,

Stay, relatively, safe out there,

Dave the Wave.