Strategy

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Welcome to the version 4 of my Crypto trading strategy. Having traded for over 18 months I have now experienced what appears like a full market cycle. We have not exited the current downtrend but experiencing my first bull market has led me to update my strategy.

If you intend to read and use any parts of my strategy then please do note the following warnings:

  • Warning 1: I am not the most technical, I have a growing understanding of how Crypto Assets and the blockchain work but there are people out there who know way more.
  • Warning 2: I am not an experienced stock market investor. The only time I have tried to trade stocks I lost over £20k. I have been able to use the mistakes of that experiment to be a better crypto trader.
  • Warning 3: this site is not giving out financial advice. I am just sharing my journey. If you choose to be a crypto investor then you do so at your own risk. Please do not just copy me. I am yet to find out if I am smart or just another lucky investor in a raging bull market, only time will tell.

 

Strategy Introduction

Note: the following is version 4 of my Crypto strategy. A strategy which has evolved alongside my personal experience/trading goals and changing market dynamics. The previous versions of my strategy are available below for comparison:

I have built what I believe is a solid strategy which works for me and is creating value. I have been sharing this in a private Facebook group and I now also share it via my Telegram channel.

I want to note a few specific thanks to other traders who have influenced my trading and strategy:

 

Introduction

There are typically two types of Crypto strategy:

  • Investment: taking long-term positions, focusing more on macro Crypto economics and asset fundamentals
  • Trading: taking short-term positions, focusing more on market cycles and technical analysis

Most traders use a combination of the two but will tend to give weight towards one over the other. Chris Burniske, author of Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond, covered this on Twitter, explaining that it is essential that you understand what kind of strategy is right for you. He shared a link from Investopedia, outlining the difference.

Investors tend to focus more on fundamental analysis with technical analysis used to support entry/exit positions and portfolio balancing. Investing long-term enables you to benefit from the compound growth of both your portfolio and individual investments, enhancing this by diversifying profits from good investments into new opportunities. Where investing in stocks allows you to benefit from incremental income from dividends, with certain Crypto investments you can do similar by staking and receiving newly minted coins from block rewards.

Traders tend to enter in and out of assets more regularly, using technical analysis to identify opportunities to buy in low on an asset and trade out either partial or full positions when reaching specific targets. Trading requires a high level of technical analysis and discipline, utilising stop losses to limit losses on a bad trade.

It is important to decide what kind of strategy is right for you. One of the most important things which Luke Martin, aka @venturecoinist said in my first podcast is that too many people try and become traders when they should really just be investors.

Historically I have considered myself an investor, but I started trading at the start of a bull market where I experienced some incredible gains, but now having experienced a bear market I am shifting myself to the mindset of being a trader. The biggest shift being that I will no longer emotionally attach myself to an investment, even Bitcoin. Having watched the price of BTC fall from $20k down to $6k, dragging the rest of the market with it, I now know that as a trader I would have made better returns respecting this.

Important Observations

Having now experienced both a bull and a bear market, I have made some important observations which I will use in my new strategy:

  1. Bear markets aren't a bad thing: historically I have invested in assets, profiting from growth. When the bear market triggered in Jan '18, I held onto assets hoping for a market recovery. This was naive on my part as markets can't go up forever (people will take profit back into fiat) and there are those who profit from a bear market. Shorting is not something I have used much, but recognising a shift in the market structure would have led me to close positions earlier and be able to profit from the downtrend.
  2. Crypto markets largely correlate: during bull market conditions, altcoins tend to outperform Bitcoin and vice versa in a bear market. This is important when considering which altcoins I will hold and the size of portfolio. While holding a broad portfolio of assets increases your chance of investing in an asset which will perform very well, it also increases your exposure when the market turns, further, with altcoins it takes time to exit the market (moving coins) and there is also limited liquidity with some assets. You only need a few alternative investments to have a broad exposure to the market.
  3. The market is maturing: the bull run of 2018 was quite something, these types of gains are unlikely to happen again. Wall street has joined the party, futures are here, ETFs are likely coming and there are more professional traders. The risk is expecting every coin to pump at some point and every masternode to keep printing money. Profit matters and if the economics of coins and tokens fail then so does the opportunity. It is important to focus investments on sound ideas and established projects. Just because the technical indicate a coin has bottomed, there is no guarantee it will move up again.
  4. Volatility is a gift: Cryto markets are extremely volatile, which is good for a disciplined trader. Assets appreciate in value quickly and also retrace. It is important to watch the market structure for an asset and recognise when it is in an uptrend and a downtrend and appropriating short and long positions accurately.

Added to these observations are some important lessons:

  1. Risk management: is an important part of any strategy and something I have not executed as part of mine. I have chosen trade entries and watched them fail, holding onto the asset for massive losses, hoping it will come back. In future, all trades will be based on an entry hypothesis and an exit, whether against a profit target or a stop loss if the hypothesis fails.
  2. Discipline: as the bull market accelerated I lost focus and threw all my rules out of the window. I became distracted with too many other things, which has hit my profits. I will now operate with strict rules and maintain discipline all the time. This will include good journalling and record keeping.
  3. You don't need many trades to be successful: looking for new trades all the time is quite dangerous as the market can be very irrational in the short term. Looking at the market structure and identifying key areas of support and resistance are places where I will focus my trades.

The above has ultimately caused significant losses from over the last 6/7 months, where I maintained a bullish mindset, waiting/hoping for the market to turn. This took a 65x portfolio growth down to a 15x. I am down <INSERT> from my top portfolio position which means I now need to <INSERT> to get back to an all time high.

 

Strategy

The three most important themes for my trading strategy are:

  1. Focus: ensuring I maintain rules, discipline and focus in my trading, this includes taking all emotions out of decisions
  2. Patience: ensuring that I keep to my trading rules, entry and exit targets
  3. Simplicity: ensuring that I keep rules and trading to a simple model

These three themes encompass every part of my strategy. I am also splitting my bankroll into three pots:

  1. Fiat: liquid cash (£pounds)
  2. Investments: my medium - long term positions
  3. Trading: short to medium term positions

My fiat v investment/trading will be dependent on market conditions:

  • If the market is clearly in an uptrend then I will be holding low fiat reserves, ensuring I benefit from the growth in the market
  • If the market is in a downtrend I will be holding high fiat reserves, few investments and taking tactical short positions
  • If the market is uncertain I will maintain high fiat reserves but be looking for good investments and trades

In order to make these decisions I will be asking myself the following questions:

  1. What is the market condition?
    This is the most important questions as it dictates my portfolio structure:
    • Bull market: I am holding a bull market portfolio structure and will consider ICOs
    • Bear market: I am holding only BTC and looking at specific trades and will rarely consider ICOs
    • Unknown: when the market is trading sideways I am looking for proof of where the market is going and setting myself up appropiately
  2. What is the market trying to do? 
    Here I will be looking at the Bitcoin chart as Bitcoin still drives overall market sentiment. Are we in a downtrend, uptrend or unknown? Also, I am trying to think what the big guys, the whales are doing. Where are they taking the market, I like the concepts of institutional flow which Cred talks about and looking for liquidity pools. I will use basic indicators to track resistance and whether there is a break in market structure. What I am looking to do is:
    • Hypothesis on where the market is going, this is really a combination of technicals and gut instinct
    • Observe what is stopping it reach there
    • What is the general market sentiment (traders, news. FUD etc...)?
    • Is the market showing any momentum?
    • Set targets for proving my hypothesis as having succeeded or failed
  3. What is my portfolio structure?
    Based on the above, I will be setting up my portfolio structure to reflect it. If I am bullish, I will be opening long positions with my investments and looking at good short term trades. If I am bearish, I will be closing positions and maintaining a tighter portfolio. If I am unsure (trading sideways), I will be setting targets for when I will be changing positions.
  4. What indicators am I using?
    While there are many indicators which you can employ for trading, my goal is to keep this simple:
    • Diagonal support and resistance: I find these work well for longer term channels
    • Horizontal support and resistance: I find these work well for shorter term confirmations, long term tops and bottoms and specific round number targets
    • RSI: I find these useful on longer timeframes for looking at entry and exit positions
    • Moving averages: I find these useful as an indicator of market confidence

Portfolio Structure

My structure is heavily influenced by Crypto Cobain's risk philosophy:

  1. Low risk (50%): this is my long-term BTC position
  2. Medium risk (30%): these are my mid-long term, high cap, valid projects (top 20)
  3. High risk (15%): these are lower cap projects, legitimate projects with solid teams and high potential ICOs
  4. Super risky (5%): this is my play money for trying things out, high leverage Bitmex setups

To quote Cobie from his Tweet "Bad choices do not fuck your portfolio, you are not exposed to risk as heavily, but you benefit from the markets as a whole". 

This structure will be regularly rebalanced to ensure that the rules are maintained. Further, this structure is for bull market only, for a bear market I will be mainly fiat, targeting specific shorts and short-term trades.

To add to this, there are two other rules:

  • I will never hold more than 15 assets but try and keep it to under 10, this is to ensure I can track them
  • I will maintain a profit drawdown of 25% to grow my fiat reserves but maintain compound growth
  • I will maintain a fiat/crypto ratio of between 0/80% depending on market conditions, I will never be completely fiat as I will always want to maintain exposure in the market

Entry and Exit

There are two types of entry I am looking at and will record these in my trading journal:

  • Investment: long-term investment in a legit project when the price is low
  • Trade: short-term trade where technicals indicate a particular move is coming

For investments I am looking to open a position, either when a project is new or has demonstrated that it has retraced into an accumulation zone, such as:

  • +80% retracement from all time high
  • Has found a specific resistance point it does not drop below and trades sideways

The general rule for trades is as follows:

  • Bullish: buy dips, sell spikes

  • Bearish: short spikes, sell dips

Risk Management

This is the most important part of my strategy and something I have historically ignored. While I won't use stop losses for my long-term BTC hold, I still may trade out after a bullish spike, looking for a lower entry back in. 

As Cred says, risk management keeps you in the game and this entire section is from his lesson, which you can see here<INSERT>:

  1. Stop losses: I won't use exchange based stop losses as I don't want to keep assets online. I will though journal my stop losses and create alerts. Another reason I won't use hard stop losses as the market is known to crash at times, taking you through a stop loss, only to bounce back. I will use alerts to notify me if I am approaching a journaled stop loss so I can make a decision as to whether to hold or close a trade. The stop loss will be placed at the point of the trade hypothesis being invalidated. 
  2. Risk per trade: what is the total % of my bankroll am I willing to risk on a trade? This is the amount I am willing to lose. This will be anywhere from 1-3% of my bankroll. Note that when market conditions are choppy or I am on a losing streak, the risk will be lower and vice versa when the opposite is true. The risk is calculated at the amount lost and stop loss and not the size of the bankroll. Therefore, if my bankroll is £100k and my risk is 3$, I am not making trades of $3k, but I am willing to accept a loss of $3k at my stop loss. This means I can trade with a higher % of my account using a protective stop loss. The calculation is as follows: Total equity * risk % / distance to stop loss from entry.
  3. R and win rate: this is something else I learned from Cred. R is the amount you are willing to risk on a trade and your win rate is the % of your trades which are winning. An R of 3* only need to work 25% of the time to be profitable.
  4. Handling drawdown: I know I need to expect losing streaks and will handle this by changing my risk if it happens. Discipline and journaling are key, focus will help me survive. 
  5. Margin: I don't currently margin trade but I will start testing this with my 5% high risk portfolio.