"Beware of the truth...Although much sought after, truth can be dangerous to the seeker. Myths and reassuring lies are much easier to find and believe. If you find a truth, even a temporary one, it can demand that you make painful changes. Conceal your truths within words. Natural ambiguity will protect you then."
God Emperor of Dune
Preamble
I followed the crypto space pretty much since Bitcoin creation in 2008, from a distance at first - alas, I never mined easy satoshis - then with growing interest since around 2017. My finances didn’t allow me to enter the market back then, since I believe one should start gambling in crypto from either a rather comfortable savings position, or from absolute desperation. And in both cases it can go extremely well or extremely bad.
Anyway, I entered the market at the beginning of 2021, with around five thousands, and reached a discreet sucess in it. It was a raging bull market, so it was really hard not to be succesful in it. What I did was play the shitcoins casino (bsc, eth dex plays) until I grew my stack enough to make high conviction plays in larger caps that paid maybe 2x compared to the 10-20x of shitcoins, but allowed me to punt with at least 6 figures with ease.
In 2022, the market changed. In the first quarter, I understood that the bull market was over and it was time to let go of the degenerate gambles and get into a more defensive and mature approach. I eventually concluded that if the market was to go down, the best thing I could do was “sell”, and I started trading perpetual futures on exchanges. The “short” button allowed me to sell coins I didn’t need nor want to have. All of this preamble to say, this is a blog post reflecting on what I learned so far in around one year of futures trading, since the way I built my capital in bull market was not trading per se, but apeing coins with “spot” that would just do multiples in a few days/weeks.
I will divide this in paragraph that go from a more technical point of view to a more psychological, as I believe that is the deeper aspect of it after all.
The trend and the chop
The market exists in two fundamental states, balance and unbalance.
At the core of it, buyers and sellers have different opinions about what the “fair price” of a share or a crypto token should be at a given point in time. If they agree on price, plus or minus small variations, the market is in a state of balance.
This means price will oscillate in a range, and will “chop” players who have a radically view of what price should trade at (much higher or much lower).
When one of the sides have a very strong conviction price should be radically different, for example if buyers think a crypto is VERY undervalued, and they have the means - capital - to do so, they will push the price in that direction. This will generate a trending market, a market that goes in a definite direction, very noticeable on the chart, offering little chance and pullback to “get aboard” the train should one be left behind.
This definition can be found in a million sources, nothing new here.
What I learned, and at times costed me dearly, about trends and range is the following:
You ride the trend and you trade the range.
Sounds obvious, even easy, but it took me a while to learn.
When the market starts trending, the best course of action is to get in a position - no matter about a perfect entry - and sit tight on it for as long as the trend does not show signs of reversals.
The trend will offer pauses and in a few cases some slight pullbacks, and one would be tempted to close the position to re-enter at a better point (for example cheaper in uptrend) but that can be a fatal mistake.
The train can resume any moment and leave you behind without a position.
Don’t lose your position in a trend.
There’s something to be said about size and instruments here.
In uptrend, a spot position is never threatened by pullbacks so you cannot really “oversize”.
If you are in a long position, with borrowed funds, or in a short, a pullback can do you more damage and even kick you out, and it is better to have a smaller position but being able to ride the trend fully.
Listen to George Soros in this passage about 2008:
https://twitter.com/heartereum/status/1651154967997173760
When market finds a balance, it will start ranging.
The first thing I learned to do is to do nothing and observe:
The market will paint a “range high” and “range low” by visiting two price levels repeatedly, and at this point you can simply “buy” and low and sell at “high” until proven wrong.
At some point price will leave the range and hit your stop loss but since ranges tend to take time to resolve, in the meantime you may have gotten 9-10 wins so that last small loss won’t matter much.
At that point market will trend again until a new balance is found and the game repeats anew.
Liquidity and size
Another thing I had to learn about was liquidity, its correlation with volatility, and its consequences on position sizing. I already posted the Soros video above, but to describe this relationship better:
in a bull market the defining factor is not just prices going up, it is also an abudance of liquidity in the market, that is participants and capital, and volume traded. Simplifying, a very liquid market is subject to less volatility, that is, it requires more effort and capital to “move” the price through “thick” orderbooks - more asks/bids must be filled on the ladder - whereas in bear market there is less liquidity so the same amount of capital can generate more volatile moves. This usually favours the downtrend but can also happen on the opposite way (books are thin both ways) that is why “bear market rallies” can be more “violent” and sustained than bull market dips.
This means that in less liquid conditions, to keep the risk exposure the same - or even reduced, since real money is made in bull market anyway - one ought to reduce positions size, and be content with less returns.
This lesson costed me dearly, but not as dearly as some who remained bull oriented the whole way down in 2022.
Being wrong
There are two fundamental lies being told everywhere about markets:
they are entirely random, don’t even try to predict
they are entirely predictable, and if you can’t you’re stupid
The truth as often is in the middle:
the best way to approach the market is a probabilistic model
This means one should approach trades with the idea that they have a certain % probability of going in your favour, and a % to go against you.
There is natural talent and learned skill to be able to take more trades that go in your favour than not, and also in the ability to correctly assess the real probabilities - so you don’t take a trade thinking you have a 70% chance but it actually is 40% - but ultimately the outcome is uncertain.
This has important psychological consequences. To use Mark Douglas example:
Imagine you pull the lever of a slot machine, imagine one where the roll is completely automated and you just pull and let it roll, and you lose.
Do you feel guilty? Do you feel you were wrong?
Obviously not.
Why? Because it did not depend on you, it was out of your control, you had no role in the outcome, in short because before playing you had accepted internally the result to be “random”.
It is difficult to mantain the same approach when trading, but in fact this is the way:
To play each trade accepting the outcome to be uncertain, accept a lost trade as part of the game and not necessary “your fault” - if you took it according to your system! - and know that your game is not to nail every trade but to be successful on a sufficient number of them on a long timeframe.
It is difficult to avoid judging and blaming ourselves for the outcome of a single trade but we should not. Again, assuming you were following your systems/signals/rules, the trade came to the level you wanted and you took it assuming the risk you wanted and were ready to lose. If you were blindly apeing, of course it’s all your fault.
What is even worse is not managing your risk, that is, entering a trade without a clear, defined condition for you to be “wrong” on the trade and cut it at a loss, whether automatically (stop loss) or manually if conditions verify (e.g. you need more context than just price of single asset). When we don’t prepare this scenario is usually because we don’t even want to face the possibility of being “wrong”, it’s our brain trying to protect us from reviving “the trauma” of all the past times we were wrong, and protect our self confidence. Unfortunately it is destructive behaviour. But our brain did not evolve to trade markets, it evolved for us to be advanced apes in wild nature.
Responsibility
The last big lesson I learned and would love to transmit is one about personal responsibility.
You are responsible for your own trading - remember, not the single trade - you are responsible for your discipline, for your risk management, for your bias, you are responsible for your position size and for changing your mind when conditions change.
There is no loss more painful to me, than the losses I took for following ideas of people who I admire and respect, instead of following my ideas and my plans.
It is terribly frustrating to lose money for acting on someone elses’ beliefs, and maybe they don’t even take the same trades or close them at different points/time, etc. but in general nobody is responsible for your execution but yourself.
You need to own your trading and respond for it. It is less painful psychologically to lose money knowing you acted on your own beliefs and charts, and it simply went the other way.
On the plus side, the satisfaction when it goes your way is clearly amplified when it was a trade you took of your own convinction. There is no second best.
See you in the orderbooks, anon.
Very helpful points, splendid article.
Excellent post. Thanks mate.