Another more practical article this week, and pertinent given the volatility we’ve seen and no doubt are about to see in the Crypto-currency market. It’s been part of my outlook and strategy all along to sell certain trades at certain times in the bull market going forward. I think it fair to say that this envisaged bull market is now beginning to burgeon, in the process of gathering some steam with a series of higher lows and higher highs seen right across the board. In geographical terms, you could say we have moved on from the plains of the base, and now find ourselves in the foothills of the mountain range that yet lies ahead. As peak euphoria comes at the top, where one is so enamored with their positions at the giddy heights, with next to no thought of selling and realizing profits, this article will focus on the psychology of selling into that bull market, and some practical steps by which this psychology can be cultivated. I’ll first give a brief sketch of the wider strategy, and then go on to look at the hedging ALT/ USD swing trade and the longer-term hedging ALT/ USD position trade. The crucial aspect of these hedging trades is that they need to be sold when the time is right in order to follow through with the strategy in play.
Review of the Strategy
The primary goal of the strategy is the realization of profits to go into real assets. From a fundamental and macro view, there is recognition involved here that real wealth involves the enjoyment/ use of real assets in the real world [the ‘there is no wealth but life’ of Ruskin]. This may seem an obvious point, and yet it needs re-stating as traders, investors and speculators losing sight of this can all too easily fall into the illusion of viewing the financial/ monetary asset they are speculating in as the denominator of their wealth. The fact is, however, what is essentially just volatile digits on a screen is the hoped for means of eventual wealth accumulation, where that wealth is solidified, as best as is possible, in the actual taking of profits and the conversion into real wealth/ assets. This distinction between financial/ monetary assets and real assets is crucial. Remember, Crypto is currency, that is, money, and money is the means to buy/ secure assets, which is the end. This outlook will help immensely in selling the means to your potential wealth accumulation at the more opportune times. Keeping in mind that the emphasis of this article is on psychology, this ‘theoretical’ point will translate into a most practical policy.
The strategy is first and foremost about risk management. One holds a core in BTC, preferably bought at lower prices, and then trades the volatility of alts as a hedge. Yes, that’s right, in hedging one entertains fully all possible contingencies - though one may have confidence in the longer-term trend [the LGC or the like], one also allows that it is logically possible for this instrument to fail for one reason or another. And so the hedge. In trading the volatility of alts, against USD of course, you are effectively counterbalancing the value of your BTC, the idea being here that if you get these longer-term trades right, or rather good enough, your trading account will keep pace with the burgeoning value of your core BTC AND with the aim of further accumulating USD, with increases your cash reserves. With this hedging policy, you are already taking profits in Crypto, which will take the pressure off you having to sell BTC at some point, where more often than not one sells only to see price continuing to spike.
But the reader may ask here, isn’t trading to be left to the experts, isn’t it essentially a gamble, and wouldn’t I be better off just sitting on BTC? The problem is one of risk here. In just sitting on BTC, there is an element of risk [and of course a hodl psychology which may make it near impossible to sell]; at the other extreme, there is the risk of over-trading and missing out on just sitting on a winner where most of the big money is to be made. There is a middle way here out of this muddle. It navigates between the two extremes, and involves trading on a longer time-frame, and then drawing a distinction between swing trading and position trading. And of course, in exercising some disciplined trading [never over-trading], one is also gaining that selling psychology that will be required in an eventual manic market where most of the profits and to be made and real wealth acquired.
The Swing Trade
As we are largely a creature of habits, selling the odd trade at this point in the game will serve to develop that selling psychology required for the end game. As your odds in trading are always increased over the longer term, the swing trade is conducted on a multi-month time-frame [I went into this further here]. Remember, the mentality to have in this trade is one of a dollar bull. This may border on sacrilege for the more fundamentalist inclined, but for the pragmatic trader and seasoned investor it is all just a part of the game of risk management. Of course, what is required here is what I’ve term 'negative capability', which is no more than the psychological aspect of contrarianism. Contrarianism, more than simply being a blanket opposition to the prevailing sentiment of the market, also involves a contrary aspect to one’s self - I am confident in the upward trajectory of BTC, but also allow the possibility that I could be perfectly deluded.
And this is where the radical volatility of the Crypto market proves very useful. Next to the ‘certainty’ [confidence] I have in BTC, is the certainty that the Crypto market will remain extremely volatile on its upward path in the aggregate. It is this volatility that can be used for your hedge, and hence the swing trade in alts, which effectively leverages the volatility of BTC itself. Notice, there is no need for actually leveraging your alt trades [which only adds another layer of risk] as there is already a ‘natural’ leverage involved. Of course, in selling the odd alt coin on a spike after being bought at lower prices, the pressure is taken off my BTC core position altogether. I can absorb a heavy correction in my long term BTC position as have taken some profits in the more volatile alts. Effectively, a win-win, whilst managing risk and avoiding the temptation to maximize gains altogether.
The Position Trade
The position trade is another more conservative layer that sits between your long-term core BTC and your shorter term [though multi-month] swing trades. These trades are conducted on the multi-year time-frame. They are similar to the core hold, insofar as they are to be held for a relatively long term [it’s all relative], but different insofar as they are eventually to be sold in a manic market. Your established positions in major alts function as a further hedging strategy, they [psychologically] enable you to sell a few shorter-term swing trades as you still have plenty of alt trades [positions] on the table. As you can see, the hedging strategy here directly relates to the trader’s/ investor’s own psychology - it effectively gives you a near anxiety-free approach to your trades and investments, where all too often you find yourself either over-exposed or under-exposed in a volatile market [as covered here].
The position trades you have, preferably in the more major alts, are longer-term trades you have ear-marked to sell. Undoubtedly, when the time comes to sell, and having watched the exponential increase in the worth of those positions, they will be a relatively difficult sell. But sold they must be if you’re to stick to the discipline and the strategy, and by keeping that ultimate form of money illusion in mind. On the manic market, when sentiment is at its peak, and the market breaks though the sentiment doesn’t until too late, you will be selling on the basis of a rationality, a policy, that is not caught up in the hype. Once again, the required psychology for selling. And then what does it really matter, if in selling your more volatile alts, that are only prone to correcting more heavily, you still are left with your core BTC?
Of course, if readers decide that much of what is written here makes sense to them, they may ask of themselves whether they’d be able to sell a minor part of their Crypto positions in a bull market. The way to do this would simply be the sale of a coin at an opportune moment. This is no more than the swing trade as outlined above. And then would they be fine with seeing that coin go higher as it no doubt will do [who ever sells the exact top?]. This is ‘negative capability’ - the capacity to wear a dollar bull hat. Here is a test. If you cannot do it, I’d suggest that you may be caught in the grip of a Crypto-fever. If you cannot critically distance yourself at this stage from your investments, to a certain extent, how do you think you will fare in a full-blown hysteria aka a manic market? If on the other hand, you develop a psychology of selling, and sustain it to counter-balance the bull in you, the animal spirits, then you’ve a much better chance of selling the top… that we all dream of. In the abstract, and well before the event, we all acknowledge the rationale and the need to do so, and think we could easily achieve it, but when in the throes of a passion [a manic market], this may prove something difficult to do in practice. The boy scout is always prepared.
For more on investing and trading the alt coins, feel free to enquire via a DM to my Twitter account - @davthewave