The Foolproof System of Trading
What follows in this next article is a look at investing and trading in Crypto from the perspective of a worldly pragmatist [not a fundamentalist]. All Bitcoin fundamentals are put to the side for one moment in order to allow the idea of risk to be fully entertained [for fundamentals can bolster one’s sense of certainty at the expense of the opposite - one’s awareness of risk]. The intention is to find an approach which may be the closest as possible to risk-free, an approach that even fools would be fine with if they followed the strategy. And of course, when we take into account the uncertainty principle, all of us are potentially fools, and none more so than those claiming an absolute certainty.
Of course, you may ask why trade at all. But then you may as well ask a duck to stay out of water. The fact is that the vast majority of those involved with Crypto-currency will be drawn to trading, in one form or another, for Crypto is inherently speculative [even investing in it]. Yet there is nothing negative to speculation per se, for it’s out of the speculative excess that the more solid underlying market cap rises. I’d go even further, and suggest that one actually ought to trade insofar as it involves hedging. The more conservative investor may, in absolute terms, baulk at this suggestion at first sight, but I’d ask them to bear with me, at least for the length of this article, as I flesh out the terms of trading and investing as relative to a wider context, and one involving the minimization of risk. In my opinion, the key for a foolproof system of trading involves developing a greater strategy that avoids getting caught early in the froth and rip currents that all too often swamp the burgeoning trader. Instead, the aim will be to navigate the dangers and currents that lie close to port, in order to catch those fair trade winds in the open seas that have a better chance of taking the trader to a rewarding destination.
I’ll adopt what I call the ‘layered approach’. The idea being that risk is increasingly managed at the lower layers with the upper layers then freed up for more speculative activity. If one were to dive straight into the upper layer, the riskiest one, without having the lower layers in place first, this would essentially just be the modus operandi of the gambler - a kind of hit and miss approach. With distinctions made between layers, we come again to the idea of a graduated spectrum. At the one end, we have the riskiest form - out and out gambling; and at the other, the least risky form - investing. Note that with investing, there is still some element of risk involved [though greatly reduced relative to gambling]. Also note that trading is something distinct from both the extremes of gambling and investment, and can itself, lying as it does on a spectrum, be further sub-divided into riskier and less risky forms. As for gambling, I’ve nothing against it, I’m a speculator not a saint. However, there’s a vast difference between the visitor spending discretionary money they can afford to lose - picking it up and putting it down as a pastime - and the poor desperado caught in the casino’s clutch. Having defined the terms, let’s know look at the layers beginning with the least risky.
1. Real World Conditions
Before one were in a position to trade, without running the risk of losing your capital to the market, there are certain conditions that should ideally be in place first. This is the lowest layer, and the foundation from which the superstructure of investing, and then trading, and then gambling [if you must] rises. Health, employment, income, a modicum of means at your disposal, and no debt are the kinds of things in which this lowest level consists. They’re all the commonly considered goods of life, yet they don’t need to be of too extravagant a proportion [which may only serve to only hinder one’s investment strategy]. I say ideally as some may have done relatively well already, no doubt due to some luck and fortune, and found themselves in the odd position of having their financial assets [Crypto] disproportional to their real assets in the real world. In this scenario, one might be better to skim off some of that profit in order to establish that bottom layer just mentioned. This would essentially be a risk management policy - realize some profits while the going is good, for one never knows what is around the corner [the uncertainty principle]. Once the lowest level were sorted, with a modicum of means at their disposal and debt free, then they could safely, or rather, in a less risky manner, move up a level.
2. Investing/ Core BTC
And here we are in the realm of investment, the least risky and most rational of the layers to rise from the base. With the uncertainty principle again in mind, some kind of diversification is required here. Remember, you’re not so much looking to maximize your profit on some absolutely certain shoe-in here, but looking to back a few distinct investment vehicles. The picture to have in mind here is one of the earliest European traders, who learnt to buy shares in a ship, and to back various ones, lest their fortune went down with the single ship they had staked their whole fortune on. At the investment level, you’re looking to cover your bases, keeping something in reserve, keeping liquid while also invested, staying flexible while also knowing when to reasonably back some venture. A worldly-wise fleet-footed practicality typifies the mindset here, not a mind weighed down by some set of dry fundamental doctrines. Indeed, such overly theoretical concerns only serve to hamstring the pragmatism required. Though the pragmatist will observe which way the wind is blowing, that is, will observe what motivates the many, he’ll do so with more a curiosity to psychology than to some supposed Truth, for the compass at his center is that uncertainty principle. Bringing this back to the world of Crypto [a world within a world for the pragmatist], Bitcoin would be such a diversified investment. Having observed the longer term trend, and being cognizant of a nascent currency gathering strength, he’ll stake something solid on it without over-reaching. The investment will be proportional to the risk and reward of the venture - if it happens to blow up, he’ll not be sunk though it would no doubt involve some skin off his nose. It would be a blow but not enough to be the cause of his demise [financially speaking]. And as an investment, he’ll sit on this as a core position, to be sold later [on a longer time frame] at his discretion, at an opportune moment, for real assets. With the second layer established on top of the first, consisting of a solid core investment in Bitcoin for the longer term, time now to move up to the next layer.
3. Longer Term Holds in Major Alts
Where one may be positioned in a core investment for the length of a multi year cycle or even longer, establishing positions in more volatile and major ‘alt’ coins, to be sold on a cyclical peak, involves super-adding yet another layer on your lower levels. As a tactical part of your greater strategy, these major alt positions are to be sold into a manic market, there by enabling you to take money off the table and realize profits… even if you decide to remain long your core BTC. The realizing of profit at this level also hedges your long core position in BTC, for, logically speaking, there are no certainties to the Bitcoin outcome no matter the narrative to the contrary. In taking profits through the alts [and even part of your core BTC], you’d almost be able to ‘have your cake and eat it too’ - keep your Crypto investment AND realize some real wealth from it. The distinction between real and financial assets is crucial here - a financial asset essentially consists of digits on a screen, whereas real assets involve the actual enjoyment and consumption of real things in the real world [be careful of rabbit holes that would blur this distinction]. The hedge mentioned here involves a pragmatic ‘negative capability’ - one manages to wilfully think the very opposite of what their major position is. So for example, if one’s major position is Bitcoin to one million dollars in a decade, the minor position is [the logical possibility of] the failure of this. If one took cyclical profits on the alt positions, it would not be of huge consequence IF the further follow through in Bitcoin failed to materialize. But of course, this pragmatic approach that seeks to minimize risk will run counter to the desire to maximize profit [and certainty] - in diversifying and hedging, one sacrifices some of the potential in order to bank the actual. Along with the reduction in risk, comes the reduction in anxiety [being angst-ridden is usually a sign of being over-exposed]. With this third layer established, which could be said to have a foot in the trading world [the longer term position or cyclical trade], it’s now time to move up yet another layer, where both are feet firmly placed in the trading world.
4. Hedging Swing Trade of More Volatile Alts [for USD]
The defining feature of the Crypto market has to be volatility. We first see massive swings to the upside followed by massive swings to the downside. The shorter term swing trade [as opposed to the longer term position trade] seeks to make the most of this volatility. The idea here, at this higher and riskier layer, is to identify certain alt coins that are more volatile, buy them at an opportune moment, and then sell them on a spike. The trade here is not primarily concerned about accumulating the coin [which has been done with your position trades], or even in multiplying the number of coins in the trade. Rather, it is a pure play on volatility - the particular tactic here involves multiplying USD and as a hedge against all your long Crypto positions in both BTC and major alts. Ideally, your swing trading account would counter-balance your long Crypto account and, potentially, even match the appreciation of that long Crypto account. As mentioned in a previous article [The nature of TA - Objectivity], the longer the time frame of a trade, the more probability it has of success. The swing trade concerning us here is not as long as the cyclical position trade [almost a hold], nor as short as day trading. It’s in a middle zone that could involve anything between a few weeks and a few months, and buying and selling depends on when the mass of market participants decide to ‘dump’ or ‘pump’ it. In the swing trade one is very much wearing the contrarian hat, and of course the dollar bull hat [for the time being], for the hedging policy consists in realizing profits in it. A solid portion of these profits can also be taken off the table, so to speak, and put to work in something totally unrelated to Crypto, such as a real asset. If the unthinkable happened in the Crypto sphere, you’d not be utterly shipwrecked as you’re hedged against some such unknowable event. Which brings us to the last layer, that of day-trading.
5. Day Trading
I am no day trader, but I by no means scoff at it. I’m sure there are those with the requisite skills to do reasonably well at it. But I do know that it involves another level of risk as comparable to the previous layers already mentioned. The attraction of increased risk of course is increased reward, a higher risk/ reward ratio. With the fool-proof layered approach it mind, one would only indulge in this increased level of risk, if they felt so inclined, after first having the lower levels in place. In having those layers in place, the amount of capital one exposes to this heightened level of risk is greatly reduced. If good at trading a shorter time-frame with leverage, there is the potential to do as well as the long term investor. And yet, only a very few [if any] are actually good at it, for the probabilities of getting your trade right reduces with the length of the time frame [see ‘The Nature of TA - Objectivity’ for further on this]. On the other hand, more leisurely and ‘lazy’ traders, with a greater time-frame in mind, and with better odds going for them, can increase the size of their trades as commensurate with the risk they are undertaking. This may have the added benefit of a more relaxed frame of mind that can look at markets with more clarity - more often than not it is over-exposure, stress and anxiety that is the trader’s undoing [see ‘The Nature of TA - Discipline for further on this]. And the most leisurely of all trades has to be the near ground level of investment - a trade because there is still an element of risk [though greatly reduced] and because any investment once reaching its goal needs be traded, or cashed in, for a real asset, money being a means to an end, not an end in itself.
It’s been my aim here to outline something as close as possible to a ‘fool-proof’ system of trading. Far from disparaging the activity of trading, it’s been my intention here to illustrate how the risk of that activity can be managed or mitigated. It’s simply a case here first of having all your bases covered, of having your flanks secured and your position fortified before striking out on those daring raids. At the end of the day, investors [and those focused solely on the fundamentals] should see investing and trading as joined at the hip, and certainly not as mutually exclusive terms divided into two camps. For it is only out of a series of speculative excesses in the interim, in the greater market in general, that our particular investments for the long haul come to fruition.