WBD226 Audio Transcription

Bitcoin Trading 101 with Flood

Interview date: Wednesday 29th April 2020

Note: the following is a transcription of my interview with Flood, a Bitcoin trader. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

In this episode, I talk to Flood, an independent Bitcoin trader. We discuss the key things a newcomer to trading needs to know from which exchanges to use, trading strategies, leverage, finding your edge and the common mistakes.

“Trading, if it’s going to be the majority of your income, really is, passively, one of the hardest full-time jobs you can choose.”

— Flood

Interview Transcription

Peter McCormack: Flood man, happy pizza day! How are you?

Flood: Good, how are you? Thank you for having me.

Peter McCormack: No problem at all. Yeah, I'm really good, looking forward to getting my pizza after this. Me and my son are going to have a pizza, so we're going to celebrate pizza day. Are you getting a pizza today?

Flood: I'm actually lactose intolerant, so probably not!

Peter McCormack: Oh no!

Flood: But I know pizza day is a huge thing for Bitcoiners, so I'll probably buy one either way.

Peter McCormack: Cool! Well, listen, look, I appreciate getting you on. So what I want to do here today, I had Willie Woo on the other week talking about some things to do with trading and I actually advise any of my friends who come into Bitcoin, I always advise them advise them to avoid trading. I try and dedicate my show to beginners. I'm always worried that people will make mistakes like I did, just go and throw in a bunch of money, and maybe like a casino, get lucky early on, and then they blow everything.

But I'm also conscious of the fact people ignore me. So I got a message from a friend the other day asking me about ripple, XRP and she was like, "Yeah, my brother told me it's going to be amazing, it's going to be the next big thing. Should I get it?" I was like, "No, just stay with Bitcoin." Then she messaged me this morning saying... It's kind of funny, so she's said, "Thank you for sharing. I'm going to admit something now. I know you'll tell me off, but I had a severe case of FOMO listening to my brother when he told me about XRP, and I invested £1000."

So I know people don't listen and I already know... I'm thinking like the title of this show is going to be, "If you're going to trade Bitcoin" and then what I'd like to do with you is just if somebody's thinking about trading Bitcoin, I want to go through like the stuff they should really think about, how they should learn, where they should start, what the basic mistakes are, things like that, just to give them a bit advice. Are you okay with that?

Flood: Yeah, absolutely! Trading Bitcoin specifically has been a big part of my life for the past five years or so now, so I wouldn't say I'm necessarily an expert on it, but I guess I am one of the success stories. They are kind of far and few between. It's definitely difficult to say you're a Bitcoin trader and not be laughed at to a certain extent by members of the traditional finance world, just because of the unregulated nature and the wild, wild west connotation that it gets, especially with these exchanges where people have no idea where they're based or who they're talking to, or if their information is being shared.

But it's rapidly becoming more and more specialized and we're seeing more and more sophisticated market participants really enter the space. So it's definitely an interesting time for crypto. 2018, 2019 were kind of slow periods, but there's been a lot of building and a lot of growth.

Peter McCormack: I almost imagine if you can trade Bitcoin successfully, everything else must seem a little bit easier and possibly a little bit more boring.

Flood: Right! Yeah, the volatility definitely attracts and repels certain type of speculators. The nature of the 24-hour market can definitely take a toll not only on you mentally, but in all aspects of your life where if you're out with friends and suddenly, there's a crazy intraday move, if you're in the west hemisphere or if you're in Asia, that can really derail your life to a certain extent that traditional markets might not, with the typical 9:30 to 4:00.

Peter McCormack: All right, cool. Well, listen, before we get into it, obviously also something happened this week. Now I don't know the guy, I don't know Ben, I never met him, but there was like an outpouring of support and sadness and a little bit of grief with regards to ActualAdviceBTC. I really don't know much about him, I seen his name come up a lot but I'm not really a trader. But I was really taken aback by the impact it had on everyone. I didn't know if you just want to say anything about him before we get going because he's well known amongst the traders, right?

Flood: Yeah, I'm not anyone that's going to do fake sympathies or anything, I was never really close with him. We kind of ran in different circles to a certain extent, but he was a trader who traded large size and definitely had some crazy stories from what it seems like. It really is tragic whenever you see someone who kind of does the same thing that you do, pass away at such a young age. It's an unfortunate event, but I wasn't close with him at all.

Peter McCormack: All right, I didn't know if all you traders seemed to know each other. But yeah, tragic losing any one at any point, but especially so young. All right, so listen, look, the way we'll do this, we'll run the show like I'm brand new and even though I know a little bit about trading, I know enough to know that I'm not very good at it and to stay away and I don't know if the time's right.

But I'm going to play this one out, I'm brand new to Bitcoin, I've just discovered it, I've been on maybe Coinbase and bought a bit and then I've seen like Coinbase Pro and Binance and I'm thinking, you know what, I can be a trader! So I'm coming to Flood, I've seen you tweeting and I'm thinking, "This guy, he seems to know a bit about trading." Where would you advise me to start? What are the things would you advise me to do before I even go and stick $10,000 into Binance or something?

Flood: There's a couple different factors to think about whenever you're considering trading. I think the first and foremost would be what percentage of your income is trading going to be. Is trading something that you're looking to do full time or passively? Because that really dictates the amount of time investment that you're going to be able to put into this sport to a certain extent or this endeavour or business, however you want to look at it.

I would say if you're just starting out, familiarize yourself with all of the literature and all of the financial terms that seemed very big and very scary, like spot and futures, and derivatives, really get a good understanding of the current market structure of how Bitcoin trades, the different exchanges, the different type of contracts offered, and that'll put you miles ahead of any of the, for lack of a better word, degenerate gamblers that are currently in this space and trading.

They are often not necessarily trading well and just having an understanding of how these products work and how they are priced and all the inherent risks and benefits, the difference between options and perpetual slots, having that knowledge and understanding will propel you and will allow you to find what traders call their edge or their niche to where they think or they know through back testing and forward testing, that they are able to demonstrate, "I have an ability to outperform the market," to outperform, buy and hold, or to limit my risk and provide the same returns as buy and hold.

There's different ways to quantify what a good return on investment is, so it really starts with the basics. There's fundamentals and everything, there's fundamentals in all aspects of life, but it would be trying to jump into crypto trading right away while it is deceptively easy, would be like trying to drive a sports car without any proper knowledge.

Peter McCormack: Okay, I think that's a really good analogy because I think if you're having your first driving lesson in a McLaren, there's every chance you're going to over-juice it and smash into a wall. So there's some good really good points that you've made to begin with. It's learning about the terminology. But the thing I'm really interested in is you said find your edge.

So I'm imagining there's lots of different ways you can trade. I know there's derivatives, I know there's options, I know there's spot, I know of all these terms, but is it a bit crazy to try and learn them all? Should you just maybe learn one particular area, learn to trade spot without leverage to begin with before you learn anything else and actually find? What is it like? Do you find an area you're comfortable in or you find an area that you find easier to gain good knowledge? How does it tend to work?

Flood: How normal traders would find their edge, let's say "retail traders", that would be they identify like, "I think whenever the market moves X percent, I can buy that retracement and over a long term and that'll provide better entries than just buying every single day at the daily close." Having some sort of formula or theory or why a certain trade thesis would work and provide better returns than the buy and hold method would be how someone kind of quantifies their edge, right?

What we're seeing now is a bunch of sophisticated market participants really come to the forefront and a number of different hedge funds and OTC firms doing what's called delta neutral trades, which are algorithmic trades where they take advantage of the different funding rates across different exchanges or what's called arbitrage. That is where they buy on one exchange and sell on another, and vice versa depending on the prices between the two, and capture the spread or they market make, which is kind of very similar to arbitrage but it's providing liquidity for other traders to trade into and you do get paid for that on a number of different exchanges, because you are taking on risk by giving people who want to execute their order at market the ability to do so.

But for a trader just starting out, they're not going to be able to compete with these very sophisticated trading firms and people who went to school and have worked in the sector for a number of years and have this experience. It's not to sound discouraging, even though it might, but there are other opportunities, depending on the amount of risk you're willing to take. These firms that are doing delta neutral basis trades may return a couple percent a month, but they don't really care if the market goes up or down. Some traders are able to return 40% to 50% per month, but they can get blown up if they're using large amounts of leverage.

So figuring out your risk tolerance and it all comes back to understanding the products you're trading, which really is key to identifying your edge or how you want to trade. It all comes down to your thesis. If you think Bitcoin is going to go up and let's say you want to bet on the price going up, you would be able to use perpetual swaps which are a derivative product or synthetic Bitcoin allowing you to trade more Bitcoin than you actually have by borrowing Bitcoin from the exchange, and then you would be able to bet that the price of Bitcoin is going up.

But then conversely, if Bitcoin goes down, you would lose whatever leverage you're using, so it's a very risky trade. Different firms employ it in different ways, but your ability to take risk and your ability to not worry about liquidity does provide a little bit of an edge over larger market participants where their trades are a bit more transparent.

Peter McCormack: Right, okay, I see. All right, well look, let's imagine I'm about to get involved, I've got about $1,000 that I want to invest and have a play with trading. Would you advise trading with... You can trade with like play money accounts, a bit like poker, would you advise that as a starting point? The reason I asked that question is that it's similar with poker.

I'm a big poker player, but I never think you can learn with play money because you make decisions with playing money that you wouldn't make with real money. But I don't know if it's the same for trading?

Flood: You nailed it right on the head! There's a lot of similarities between poker and trading in the sense of there is inherent risk. Playing poker for no money, what's stopping me from shoving random hands pre-flop. It doesn't it doesn't make any sense. Trading is the exact same way, the emotions and the risk, the kind of mental ability to sit through a loss or handle that sort of drawdown being able to lose a pot in poker, if we're keeping the same analogy, is crucial to becoming a good trader, becoming in a sense, numb to the outcome of your trades, as long as you think you're executing them to the best of your ability, you can't necessarily be short term results oriented.

If you think you have a winning strategy, but maybe you got a little unlucky or you were slightly too early or wrong or Binance got hacked or something, some event that's a little bit out of your control that you necessarily couldn't foresee, cannot deter you from executing your strategy to the best of your ability. But yeah, play money will not help you at all, because understanding the emotional aspect of making and losing money and the inherent greed that most humans have, you're not going to gain the same skills by trading $10,000 with play money.

You may knock it out of the park, but then give someone $100 of real money and suddenly their heart's racing every time they place a trade and stuff. So no, I would say if you're going to learn trading, it starts with an investment in yourself, even if you're going to lose money, which you most likely are at first as you're figuring things stuff out, it's learning fees to a certain extent.

Peter McCormack: Did you have to go through some painful early lessons? Did you have to get a control of your own emotions?

Flood: Yeah, absolutely. I've had not spectacular drawdowns because I'm having a bit of a background in finance, so I really cared about risk and the ability to hedge and minimize your drawdown via stop losses. That's all very basic stuff, but when I first came into the crypto space, people were just kind of all in this very illiquid shit coin, for lack of a better word, I don't know if I can say that on this show?

Peter McCormack: Dude, I swear relentlessly. I just had a show that came out today with Cameron and Tyler Winklevoss on. I think most of the way through, I was like, "Fuck this, fuck that!" So you're fine, you can swear.

Flood: Okay, perfect. So I saw people with no risk management, no portfolio sizing, no systematic approach to the way they trade and it worked out for some and others blew up in spectacular fashion. What it really comes down to is handling that emotional aspect once you detach yourself from the PnL and the numbers.

Don't get me wrong, I still get euphoric when a trade goes my way and I still can feel like shit if a trade doesn't work out, but in the grand scheme of things, the way that I'm sizing my trades and the way that I approach any type of trade that I'm going to take a lot of risk in, I've done my research and I'm totally fine with the outcome, because at the end of the day, it just comes down to your portfolio sizing and how apt you are going to be to take risk.

Peter McCormack: All right, I'm going to come back to risk because that's something that's in my list of items to talk to you about. Okay, so look, day one, I'm thinking about trading, I'm willing to maybe put in $1,000 and have a go at this. How do you even go about selecting which exchange? Because there's so many different options, there's so many different exchanges.

You're going to have a personal preference, which is cool and I think that'll be good for people to hear. But you must have been through a few exchanges or do you actually trade with multiple exchanges? Should somebody start with one or I know there's a lot in there, but how do you even go about choosing where to start trading?

Flood: Yeah, I would heavily recommend again, starting with one exchange and understanding it inside and out and understanding even how deposits, withdraws work, what their security system is like, all of the aspects that will make you feel at home with that exchange and even developing a good relationship with customer support in case things do go wrong or you do make a mistake. That'll be essential later down the line in your trading career.

I would recommend sticking with one exchange and sticking with products that you're interested in and products that you're knowledgeable about. For example, if you think you have what's called an edge, if you think that you understand ERC-20 tokens far better than anyone else, then you really have no reason to trade on BitMEX, right? You would be better off investing in alt coins and be able to trade there, so Binance or FTX would be a better choice for you.

If you think that you have an edge trading options, maybe you've traded options for a very long time, then Deribit would be your go to or if you want to trade a regular regulated exchange, then you can trade on the CME and they offer both options and Bitcoin futures. So yeah, you should absolutely start with one exchange because the average novice trader is not going to be deploying these very intricate strategies where they need liquidity on multiple exchanges, just familiarizing yourself and really knowing it like the back of your hand will definitely give you a leg up on your competition to say the least.

Peter McCormack: All right, so again, there's a lot of options there, a lot of different types of trading. Do you think spot trading, just having a play with that to begin with is a good starting point? Also, with regards to leverage, would you say people should really avoid leverage when they're starting out?

Flood: Yeah, regarding spot, I think that's a fantastic way to start because you don't have the ability to be liquidated if you're not trading on leverage. So your maximum drawdown would really be if Bitcoin goes all the way to zero, that would be essentially a catastrophic loss, you would lose all of your initial investment and which we all know that's fairly unlikely to happen.

I think if you're in this space for an extended period of time, you'll quickly realize that the probability of that happening is extraordinarily low. If you think it is high, then you probably shouldn't be in the space, because it might ultimately be a waste of time. But yeah, spot trading, just focusing on the basics, buying low and selling high, buy Bitcoin on red days and sell on green days is a very simple strategy. Or even using a very simple indicator like a moving average like, "Okay, if Bitcoin trades above the 200 day moving average on the daily timeframe, I'm going to buy $100 worth of Bitcoin every single day."

Then if it trades below the 200 day moving average, I'm going to liquidate my position and take my profit. That's such a simple strategy that may have worked a couple years ago, I haven't tested it. I haven't tested it recently, but having a simple thesis or a simple gut check to execute your trading strategy is going to be essential, that's really where you discern your edge. You can mix and match all of these different indicators and strategy, volume, order flow, everything, it becomes an amalgam of what you base your trades and bias on.

Peter McCormack: Okay, that's interesting. So it seems to me like the early day is really just trying to get your head around, very simply, whether Bitcoin is going to go up or whether it's going to go down and what are the indicators that might lead to that? So what are the indicators that might lead to it being overbought or oversold? Is there certain information in the market? Is that essentially the earliest thing you should be learning?

Flood: Yeah, you should definitely be understanding market mechanics first and foremost, why products move a certain way or how they're priced, then you can start developing theses on why these products move like they do. If Bitcoin goes up, obviously there's more buyers than sellers on a fundamental level. But if you want to get more granular, you can look at, "Oh, there was not enough aside liquidity on a certain exchange and that caused a bunch of shorts to be liquidated. Then it started this chain reaction, where price jumped 4%, or something of that nature.

You can get more and more specific, and you can really look at data and base your thesis based off that. But in terms of indicators, there's no magic indicator, there's no magic trading suite that will give you guaranteed returns or make every single trade you make profitable, because if there was, why would anybody give it away? These indicators and these tools are the way you're going to formulate your thesis. You're going to think a very simple indicator that was all the rage in 2016, 2017 was like RSI, people love to say, "Oh the RSI is above 80, this means that Bitcoin is oversold."

I've seen it used less and less now as people probably realize it isn't quite that relevant, it's just a 14 candle look back and an oscillator based off that. That was just a very simple way of kind of organizing data and being able to see Bitcoin has been being bid and bought up for an extended period of time, so a retracement or profit taking maybe likely. There are far more sophisticated trading suites and indicators and something that's all the rage right now is people love looking at order blocks, people love looking at resting bids and asks across different spot exchanges like Binance and Deribit.

There are a ton of platforms that will allow you to visualize this data conceptualize it in a very easy way like XO charts or TensorCharts, you'll be able to see the actual large bids and asks and how price kind of oscillates between them. I don't use it that much in my trading strategy, but it definitely is relevant. If someone puts the intent and not necessarily... If someone is broadcasting the intent, "Hey, I want to buy 10,000 Bitcoin," that's quite a large number of sellers that have to step in in order to chew through that amount of cash.

Likewise, if someone broadcasts the intent to sell 10,000 Bitcoin at $10,000, that's quite a large number of buyers that have to step into move the price above that level. So I think it is relevant to look at anything that will give you a clue or provide you some sort of hint as to which direction you believe the market is going.

Peter McCormack: Other places that you can go, like resources for learning these early kind of trading strategies, give you a bit of idea because you say about finding your edge, but I think it's going to be difficult to find your edge without actually reading about some trading strategies first. So are there places for that? Are there also then once you have dipped your toes in, are there places to go that are good for finding information out that is going to help you with your trading strategy, like ongoing data?

Flood: Absolutely. Some of these are paid services, some of these are not. A fairly good trading suite that has been around since 2014 was SPYderCrusher Market Research or SCMR. It was something I used in 2016, 2017 before I got kind of a little more interested in the indicator side and what really went into the back end and kind of commissioned people to make me stuff to a certain extent that better suited my trading needs.

But that was a really good way of broadcasting buy and sell signals and it was a really ingenious trading suite that took candle opens and candle closes over a large period of time, over a large sample size throughout the Bitcoin chart and gave you a good way to look at that data and visualize it. There are a number of good trading sites to learn the basics of technical analysis or these other ways of approaching the market like Baby Pips.

That's kind of the go to default training course for most people and I believe a lot of their content is free as well, just being able to learn like, "Okay, what is a candle?" Quite literally the basics of trading, what does it mean when a candle has a wick, what does that mean towards price? You can kind of make all these inferences based off a chart and everything like that. That's not necessarily my trading strategy to a certain extent, but it's a good place to start. It's a good place to just again, learn the basics and really familiarize yourself with all these concepts.

Peter McCormack: All right, that's a very good start. So let's get back to leverage, my very first experience of trading was back in 2013 with CFDs, won and lost a lot very quickly. Leverage always got me into trouble. So let's talk about leverage. Should people be using leverage when they start out? If not, when should they introduce leverage and what leverage is too high? Because we've seen some exchanges out there that have some crazy leverage options,

Flood: I look at leverage quite a bit differently than I think someone who just is looking to gamble in a sense. Leverage is a method for me to reduce my counterparty risk. If I want to hedge 1,000 Bitcoin notional worth, if I wanted to hedge... Let's say, I had an account with 1000 Bitcoins in and I wanted to sell them or I wanted to protect against downside, I could take 100 of those Bitcoins, deposit it on an exchange and use 10 times leverage to be completely in cash, because I own 1000 Bitcoin and I'm selling the equivalent of 1000 Bitcoin on leverage, on let's say, BitMEX.

So I'm looking at leverage as a tool to minimize my counterparty risk if BitMEX were to be hacked or my account were to be compromised and that way, I won't have to use all of my cold storage coins, and I won't have to risk some sort of systematic exchange blow up or some sort of trading error or any of these things that can go wrong in an unregulated market that you're not necessarily going to be refunded on. Leverage is a tool for me to not have to use all of my Bitcoin to make any size trait. But a lot of people look at leverage as the ability to just simply borrow money and trade more money than they actually have, which is a good way to lose your money a lot faster.

Like we talked about earlier with spot trading, the fact you can't be liquidated and lose your entire account balance unless Bitcoin went to zero, that's the opposite for leveraged trading. If you're trading at 100 times leverage, 50 times leverage, you're going to be liquidated very quickly. So I don't think there's necessarily any leverage that's too high or too low because there are a number of different trading methods that you can use that use different types of leverage.

But I really think people who are just starting out should avoid leverage completely, because leverage just magnifies your losses and gains. Having that, especially if you haven't mastered the emotional aspect of having a large drawdown, using too much leverage can really make you panic. It also decreases the probability of you being right to a certain extent. Let's say you buy Bitcoin in this most recent drop as a great example, let's say you bought at $9,000, but you bought at 50 times leverage, you would have been liquidated at like $8,980.

But now that we're 24 hours past that sort of dump, you would have been in quite a bit of profit, but you're wrong because your timing wasn't perfect. The higher leverage you use, you really have to be more and more precise with your entries, which is just not really realistic all the time. You're going to be a bit early, you're going to be a bit late, but that doesn't mean it can't be a profitable trade.

Peter McCormack: All right, great! So I'm going to start out with spot, I'm not going to use any leverage to begin with, I'm going to check out some of these resources and definitely going to try and find my edge. What about in terms of setting myself up to trade? There's a few things here, equipment, is there any particular equipment I need? Are there any particular websites I should be subscribed to? Something like Tradingview? Will that help? But also, can I do this part time or should this be a full time endeavour? There's a lot of questions in there, and if I am doing it part time, what are the things I need to think about?

Flood: Okay, so let's tackle the equipment first and foremost. Again, Tradingview is kind of the go-to platform for retail traders to just be able to access charts, which again, is just a way to visualize data. I think they have a free version and they have a paid version. I have the paid version, it's great! You can put on a number of indicators and go from there and play around with everything to your heart's content. That's a great way to just look at what type of trading strategy you might want to employ.

You can back test if you have some sort of coding knowledge, you can back test a particular algorithm that you come up with or some sort of particular strategy like buying in a certain month of the year or something very simple, so a very simple strategy. So that that's a good start. You don't need any paid, fancy indicators because what's really nice about crypto is a lot of stuff is free. I use a lot of indicators from a friend of mine called Insilico. He creates very similar trading suites to SPYderCrusher Market Research, but he doesn't charge $500 a month for them.

He'll give you access to them for free, if you ask nice enough. Then some of his stuff is paid though, if you want some of the more granular things. Okay, then on to your second question. Okay, so I've started trading, I'm kind of setting up on an account, is this something that is possible to do part time? Absolutely, and you just have to think about what your time horizon is. If you can't sit there and employ what is called scalping strategy where you're going to take very quick trades, very quick entries and exits that really require your full attention, you can broaden your time horizon and say, "I think Bitcoin will go down here over the next week, so I'm going to short. I'm going to set a level where my thesis is invalidated, and then I'm going to walk away."

That can be a part-time essentially trade, that requires very little management and very little attention, but can potentially make you a large amount of money if you're correct. So I would say absolutely not, the majority of traders' times is not necessarily spent button clicking on an exchange and buying and selling rapidly, unless that's your trading strategy. A lot of it is formulating these thesis, these ideas, these reasons why we take trades, the kind of overall market analysis doesn't come from staring at a chart for 12 hours a day. That doesn't make you a trade, it comes from making informed decisions and bets basically on why you think Bitcoin may go up or down.

Peter McCormack: Yeah okay, that makes sense. What about it conversely? I mean, I think I know you're going to say there, but can you spend too much time trading, like over trade, and that can that affect you? Just to add into that, like in terms of your health, do you actually need to consider your health, your fitness, your wellbeing with regards to this?

Flood: I'm really glad you asked about that. I see people over trade when typically they're either on a really nice win streak or when they've lost a large amount of their portfolio and they really want to try and make it back as soon as possible. That's a really good way to completely go bust. You really have to look at trading as a business where if you lose all of your capital, that's game over. It's very unlikely you're going to make all your money back if you experience a 90% drawdown, but you're not out of the game completely, right?

These people who unfortunately have not done their homework, don't understand the products and attempt to trade all the time and really just try and capture every single move on this very volatile asset. I'm sorry, maybe point 0.001% of the of the traders will excel and you'll see them on the BitMex ROE leaderboard, but the majority of these traders will bust after a week, and then reload their account, bust again, and it just becomes a cycle where they never build up capital.

They continue to use high leverage, which just decreases their probability of ever being correct or ever making sustainable profit or income. In terms of your personal life and your health and your fitness, if trading is going to be the majority of your income, really is passively one of the hardest full-time jobs that you can kind of choose as your as your primary source of income. It really does take a toll on your personal life and it'll get in the way of relationships and everything.

You have to understand that you are making this sacrifice, this time, or even passively that you spend thinking about the Bitcoin market or thinking about any market in general that you're trading. It really is no joke. It is in a sense, to use another poker term, you really have to dedicate your life to be successful because there are people who are far brighter than you, far hungrier than you who spend every single day thinking about the market, thinking about their next trade, formulating a thesis on why they should buy or sell or even conjuring very complex trading strategies and researching and sharpening their craft. If you're not doing that, you're going to fall behind.

There have definitely been times in my trading career where maybe I was going through a breakup or I was a bit busy with family issues and it can really take a toll on your mental state. You can kind of get in this downward spiral of "Oh, I'm not trading well" and if you base your identity and your self worth on something like that, and it is your full time job, it should really go downhill fairly quickly.

Peter McCormack: Well I can compare again back to poker and what we say is you go on tilt. I know my edge, my edge is six seats, mini tournaments as it goes. I know in a six-seater, I will finish on average first, one in three and finish second one in three, and it's a numbers game. If I play enough, I'll do well. If I play nine seaters I just don't have the same edge, I don't know why. I play cash games, it's exactly the same, I think it's just the kind of hands I tend to play.

I always tend to play the same hands across all three games. It just works on that one. But I also know when I'm on tilt and I know when I start drifting out and playing the wrong hands, I just have to walk away, and it's not even just like go and have an hour's rest. I perhaps have to like leave it for a week, go away, collect my thoughts, go for a few runs, get healthy and I just imagine it's very similar.

Flood: Absolutely! Even in terms of bankroll management and that whole aspect, the emotional side of poker in the sense of... I've played a fair amount of poker as well and being able to handle losing is not something that all humans are capable of. It's not to knock the standard 9 to 5 job, but trading and poker in a sense as well are not linear professions. There's no guaranteed return or result just for showing up to work. You can spend hundreds of hours attempting to formulate a reason why you should take this trade, you execute it perfectly, and then you get stopped out or you end up being wrong, your options expire worthless or let's say you get an aces versus kings pre-flop and they then get a king.

You did everything right, and you still lost and that's a very uncomfortable reality for a lot of humans. That's something you really have to ask yourself is, am I okay with investing a ton of hours and potentially resulting in failure with not necessarily a salary to guarantee income or anything. That's why I kind of brought up bankroll management in a sense, as your trading bankroll should not be used as your rent or money you're going to use for groceries. Your capital that you use for trading or investing, or whatever type of endeavor you choose really needs to be completely set aside and independent from what you use for everyday expenses.

Peter McCormack: You've probably seen a bunch of traders come through. I'm sure people message you, I'm not sure if your DMs are open, but you've seen them come through. Is it kind of obvious sometimes that some people aren't cut out for this and they should just walk away, learn that this isn't for them?

Because in some ways, it feels like if you keep getting this wrong, you keep losing money, it doesn't feel like you're trading anymore, it feels like you're gambling. I feel like trading really is a profitable business, but when it becomes unprofitable regularly, it's gambling because you don't have an edge. Is that a fair observation?

Flood: I think it's less so of looking at it like gambling. Life is a gamble, right?

Peter McCormack: Yeah, true.

Flood: You go across the street, you can be hit by a car. I try and steer away from the connotation that trading is gambling. I look at it more like taking on more risk than the average person. If someone shows up to work, they get a guaranteed paycheck. Whereas with trading, there isn't necessarily that guarantee. There isn't that "Okay, I'll receive $80 a day for staring at a chart." That's not true unless you work at a trading firm or something. If you're trying to do it independently, then there's no guarantee. What you brought up with people, especially with DMs on Twitter and even in my personal life of people who have asked about trading or "Oh, you trade Bitcoin. I want to do that", or, "Oh, I want to get into trading stocks."

Well typically what I noticed is when people reach out to me on Twitter specifically, it's typically when they're losing. They say, "Hey, I'm down $10,000. I have $2,000 left, what should I do?" It's like, that's a horrible way to approach it on two levels in the sense of you still believe you have $10,000 it's like no, now your bank roll and your capital is $2,000. You need to get it out of your head that you are trading that size because that's going to allow you to rationalize yourself to lever up. Then there's the potential of a blow up.

Also in the sense of only reaching out for help or trying to formulate connections when you're on a downswing and when you're losing, you should constantly be trying to improve your trading strategy and you should constantly be trying to share information. A lot of people ask me like, "Oh, how have you been consistently profitable" or "How have you been even around, surviving in this space?" As we saw from the March drop when we when we dump around 60%, a lot of firms blew up, a lot of people are no longer in the space because they went bust. Surviving is kind of a skill and it takes a lot of tenacity to persevere in this market.

But in terms of if you want to, if you want to seriously take trading to the next level, you have to form groups. I found that what has helped me the most is a tight knit group of friends and people I consider hopefully smarter than me who I know, to a certain extent, are smarter than me, and really bouncing ideas off of them.

You're not always going to be on the same page, someone may have a totally different take, but the way their brain works, the way they look at the market and the way they crunch the numbers, may be completely different to you and give you a very different perspective, which is invaluable. I wouldn't ask Joe Schmo from the street of like, "Oh, do you think Bitcoin is going to go up or down?" Because he's not making a very informed decision, but with a tight knit group of my friends, I think we can come to some very solid conclusions.

Peter McCormack: So is this like WhatsApp group and Telegram groups? Are you just running maybe sometimes a thesis by someone, discussing ideas with them?

Flood: Yeah, absolutely. My friends and I use Discord. We kind of have a larger discord for a larger group of people where it's more of a discussion. I have one that's open to everyone, it's called the CryptoCartel. I'm not too active in it anymore, but I used to really share a lot of information and try and help people to a certain extent, all for free by the way. I would never do anything for some sort of fee. Anything I do is kind of out of the goodness of my heart.

But yeah and then as you get more and more specialized with people who have a similar trading strategy as you and really are on the same page, you will get more and more hyper specific and hyper focus. Having a bunch of different minds all coming up with similar thesis, I don't want to say will necessarily give you a higher likelihood of it being right, but it can definitely give you more confidence in the trade if all these people that you think are brilliant and have been provably profitable for an extended period of time say like, "Wow, this makes sense" or "This is very interesting" or "I didn't think about it like that." There is alpha or measurable profit in sharing ideas and formulating these trade ideas together.

Peter McCormack: What about these paid groups? What do you think of paid groups? Are they good, are they bad, are they all bad? What what's your general view on them? What are the warnings about them?

Flood: Paid groups are... I'm going to totally generalize, but I would say 99% of them are a scam because if anybody has a trading strategy that works and continues to work, then they would have no need to ever use that medium of income where it does take a lot of upkeep, there are inherent legal risks, there is the potential for if you're not necessarily a good trader to really lose people's money, because they're going to blindly follow you. If you haven't been profitable, and you suddenly start a trading group, which happens all the time on crypto Twitter, then you really have the potential to ruin lives to a certain extent.

So I always try and steer people away. Please, please, please engage with people on Twitter, become an active member in these free Telegram groups like Whale Club or the Crypto Cartel there. There are a number of different discussion groups, where if you provide good insight and you attempt to have engaging discussions and you really try and dry these out of people, you are going to make these connections and have something far better than you would ever get in a paid group because at the end of the day, a paid group is kind of a meta class on how to scam people, but few people realize that.

They don't make money trading, nor do they have any incentive to trade at all, because they're already making a guaranteed income off your fees. So it's pretty surprising that people hold paid groups in such a high regard. I would say if you are thinking of joining a paid group, ask your paid group leader for his trading history, ask him to prove that he's been profitable in the past because a lot of people just are not transparent.

They have no reason to be because if they can market themselves as a successful trader or they have really pretty charts that are very aesthetically pleasing to the eye, they mark out, "Oh, the monthly open, the daily open, this is where the Delta shifted" or something, they just use a bunch of fancy words, people can get sucked into thinking they're a profitable trader.

Peter McCormack: Dude, I'll tell you something, when I first got into Bitcoin trading and I made a few Bitcoin, I had this really successful Ripple trade, which was ridiculous. I put like equivalent of about $500 and I walked away with about $30,000, but I always convert it back to Bitcoin. There was this guy, I'm not going to name his name but he was a known as a trader around those times and he had a group and he had videos.

I think I paid a Bitcoin to get his videos and a Bitcoin to join his group, and I never used it. I look back now and I'm like, "Shit, that's two Bitcoins. That's nearly $20,000, what the hell was I doing?!" But you get those early lessons. All right, so what about what about the early and obvious mistakes that people can make that can totally wreck themselves? What are the top two, three, four tips that you'd say that things to avoid?

Flood: Just off the top of my head, avoid leverage when you're just starting out, stick to spot like we discussed. There are a number of good platforms that you can trade spot on. Obviously my recommendation would be Bitfinex, if you can get approved, then you can go on to these kind of higher fee places. Even Binance is pretty good and OKCoin is decent as well. So definitely avoid leverage. Secondly, really familiarize yourself with the products. I've said that like 30 times, but I can't stress it enough. Understand what you are trading, that is essential. Then third, I would say get your hands dirty.

You can't learn by not making mistakes trading. You can't understand the psychology behind trading without attempting to trade yourself. It's very difficult for anyone to really teach someone how to trade through a book. That's why I never really recommend trading psychology books or anything like that because it's very hard to understand the emotional greed aspect of trading, unless you're actively doing it yourself. So I would say a big mistake to avoid would be starting with too large a percentage of your capital to begin trading.

Even starting with something as small as $100 right, if I have $10,000 in my bank account, starting with $100 and attempting to trade with that, that's 1% of my net worth. Let's just say $10,000 flat, that's a good place to start. If you see yourself consistently winning, and over a large sample size... I don't mean you make one trade. You're like, "Okay, time to deposit my bank account." It doesn't work like that. But definitely starting with too large amount of capital and not really realizing the risks of trading is definitely a good way to lose before you've even really started playing the game.

Peter McCormack: All right man, there's lots and lots of good advice here, we're going to come to an end soon because I think there's a lot here people will have taken from, there's a lot to take in and learned a lot. Just got a few things I want to close out with you. Tell me about BitMEX because I've never signed up. Even during like the crazy times, I was like, "I can't do it, I don't want to do it, I'm scared of doing it." I used to hear so many times about people getting wiped out on it. What are your views on BitMEX?

Flood: Okay, I've been extensively trading on BitMEX since early 2015, so I've seen them go through a rotation of quite a number of different products, some complicated, some deceptively simple. I think BitMEX had the advantage of the first mover advantage. They were really the first people to put together a functional exchange that allowed tremendous leverage and very little counterparty risk on their end because they've never been hacked.

They have generally a good reputation despite what crypto Twitter might think. But yeah, there are a ton of horror stories of people again, starting with too large a percentage of their capital and trading products that are deceptively simple. You can buy and sell 100 times what your account balance is, you can be wiped out very easily. But I think BitMEX for sophisticated traders and largely other exchanges now, to a certain extent, have been a vehicle where money has been transferred from degenerate gamblers to market participants who understand what they're doing.

Similar to poker, there's always going to be fish and people who are not taking are just gambling in a sense and don't have any structure or method to the madness. They're just kind of button clicking. But I think BitMEX has provided an incredible service for the space and giving people the ability to hedge their Bitcoin exposure and giving them the ability to gain more Bitcoin exposure while reducing their counterparty risk, I think that people being wiped out and all these horror stories really stem from people who would have been wiped out in a number of whether they traded traditional markets or whether they went and played blackjack.

I look at it and view it in the same way where if you're just shooting in the dark and you really have no idea what you're doing, it's like, yeah, of course you're going to lose money. But I think BitMEX is still one of the better platforms, if not the best platform and they definitely have the longest standing reputation. But they do have quite a few eyes on them now in the sense of like regulatory agencies and stuff, due to the fact that they were the first exchange to make enormous profit from providing a functional exchange with massive volume and great liquidity.

Crypto trading is a magical thing because you don't have to go through a broker, you can sign up anonymously. You have access to some of the best liquidity in the world, whereas you don't really get that in traditional markets. Fees are very low compared to, I want to say like if you were to trade stocks, fees are going to add up very quickly, whereas with crypto trading, you can actually be paid to provide liquidity, which is something that a lot of people don't necessarily do on their Robinhood account, as they don't have the option to do that.

Peter McCormack: All right, one last important question and then I've got like a couple of closing ones. What about security? Is there anything specifically you need to consider with security? Because look, we know with Bitcoin they're like not your keys, not your Bitcoin, don't keep it on an exchange. But you can't trade without being on an exchange. Is there anything specific with regards to security that people need to be thinking about and doing different if they're an active trader?

Flood: Yeah, it's kind of the no brainers stuff. Don't use the same password for everything, use a different email for your crypto stuff than you would use because you don't know what website you signed up for, you don't know if you've repeated the same password on a number of different places, so definitely whenever you start crypto trading have a set email, a two-factor authentication and even if you get very serious, a separate phone number that you don't give to anyone that you strictly use for SMS confirmation. Just really brush up on opsec.

There's a ton of really good free articles on that you can check out that detail how to really securely trade and hold your Bitcoin. I personally use a YubiKey, which is a user two-factor authentication. So in order to log into my BitMex account, which people try all the time, you need the actual YubiKey and you would physically need the key in order to log in. So I would recommend that if you're kind of paranoid like I am, but two-factor authentication is good enough and is essential for trading.

In regards to like not your keys, not your Bitcoin, again, it all comes down to the counterparty risk. People who are trading with 0.1 Bitcoin, I would chance it. The risk of loss if in exchange went under was hacked or something is relatively low in this day and age, but certainly in the past, it was a much more serious concern.

Peter McCormack: All right, this has been amazing, thank you for doing this! I think this is going to be really useful for people. Before we close out, you got any funny interesting stories, any crazy losses where you look back and think, "Holy shit!" I mean it's Bitcoin pizza day, my crazy losses, well, the half a million I put into mining and lost. So that's always my one a few years ago. Fuck, that might be like $50 million in the future!

Flood: Right, that's pretty good! I have one funny story. July 4th is a friend of mine's birthday, so we were celebrating a mix of the US holiday and then my friend's birthday, there was quite a bit of alcohol involved and I had a fairly large trade on, a seven-figure notional size, US dollar value trade. I always have stop loss, I'm very meticulous with managing risk and everything and I think I was long. This was last year July, Bitcoin was around $9,200 or somewhere around that level, I remember I've longed $9,500 or $9,400 and the price dropped 4% to 5%. So I was like, "Oh, I set my stop loss 1% below my entry."

I don't remember the exact specifics, but I was under the assumption that I had a stop loss. But what I actually did mistakenly was edit my trade somehow, so I accidentally removed my stop loss. So I woke up the next day, and I had a quarter million dollar loss! It's not that funny when you think of it, but it is now and that's a fairly large loss! It was especially brutal because I... It wasn't realized, it was still unrealized, the trade was still open! I think we dropped to $8,800 or something, I could be mixing up the numbers. But the point is, I had a very large unrealized loss on my account, and I was freaking out, because it was almost even worse than that loss being... Because I didn't expect it.

So I set a stop under what I thought invalidation would have been for that trade, if I had entered it at that price. I looked at it at a new trade and I exited close to breakeven I still took a fairly substantial loss. But I kind of said, "Well, I'm in this trade, would I go long here? Yeah, so where would I set my stop? I looked at it as a new trade and I ended up with like a $30,000 loss or something, far, far smaller than a quarter million dollar loss. I don't care who you are, that's a considerable amount of money, even if you have $10 million in the bank!

Peter McCormack: Yeah of course it is, but it's a sunk cost at that point, right?

Flood: Yeah, exactly. So I treated it as a new trade, we ended up rallying, which I was extraordinarily thankful for and since that day, and I've seen it happen to friends as well, really set your stop loss before you even take the trade. That way, you have no way of forgetting. That should be the first thing you do when you execute a trade is you should have your stop loss. Since then, that's the one and only time I've ever forgotten to stop loss. It could have been a lot more costly than it was, but thankfully I made it out alive.

Peter McCormack: Okay, come on man, how did that honestly feel when you first noticed?

Flood: Oh man, I freaked out! I called my friend. I was like, "How could you let me do this? How could you let me log into my BitMEX account drunk? It's unbelievable!" He was like, "I don't know, I didn't even notice that you did." So it was just like complete shock and awe. I've experienced drawdowns of that magnitude on individual trades, but I was prepared for it, I understood the risk and the potential payout was magnitudes larger than what I was risking.

But it was worse because I thought I had lost $30,000/$40,000 when it was really quite substantial of a loss! Yeah, I mean waking up hung over, your account decimated to a certain extent, definitely probably the worst hungover experience I've had in a while.

Peter McCormack: I had a similar one, nowhere near those numbers. So back in 2013 like I said, I was trading CFDs and I discovered Bitcoin. I didn't really understand what it was I was trading CFDs on Plus500, making and losing money, doing okay and then I started just trading tech stocks. I was trading Tesla and Tesla was quite volatile back then, I think it was after the Roadster came out, I can't even remember, but they were doing well. Very early day in trading, I just noticed like, "Oh, it seems like every like hour, it seems to like go up a bit, and then come down a bit, and then go up."

So I just kept doing that up and down with it, leveraging and I was sat on a train, going down to my ex-wife's parents at the time. I was going up and down, making a lot, like a decent amount of money because I was on leverage on these little moves. Then what happened at the end of the day, the trading closed out and I was in a short because I was short in one way and long the other way and I didn't even think anything of it.

The weekend went by, and then some news got announced over the weekend. I didn't realize there's this like out of market trading hours, so you could see what's happened with the price, but I couldn't do anything because my trading was limited to, what was it, like 9 to 5 on whatever it was. By the time I opened this account, which I'd grown to about a £10,000 profit, I think I wiped out about £4,000 in one go. Now the number doesn't seem huge, but at the time, I didn't have much money and that's a huge amount of money because I was in leveraging, caught in a position. I think we all go through little exercises like that and learn.

Flood: Oh yeah, absolutely! The magnitude of your loss, all it comes down to is the percentage of your account balance. So it doesn't really matter the notional size, but whatever percentage you loss can definitely feel like a punch to the stomach. Everyone starts somewhere.

Peter McCormack: I feel shit. I remember phoning up my ex-wife at the time, actually she wasn't even my wife at the time and I just remember phoning up and say, "Look, I've got to tell you something because I'm at work and I feel terrible. I don't know how to process this." I had to phone her up, and she was really good about it at the time. But yeah, I was one of those moments. I think that was when I stopped trading and I was like, "This isn't for me." Then 2017 happened and then I went degen again! Listen Flood, really appreciate you doing this, really enjoyed this. I think it's going to be really useful for people.

I still say to most people, people shouldn't trade, most people should really just try and find a strategy which long-term works for them. I always say 10 years and to have a 10-year horizon, buy a little bit here, a little bit there, but I do know some people do want to trade and so if they do, I think this is a really good starting point to introduce them to it. So I really appreciate your time in doing this. If people want to follow you, tell them where they can get hold of you.

Flood: Yeah, my Twitter account is @ThinkingUSD, very simple. I really appreciate you having me, it's a great opportunity, you have a great platform here and I've listened to your podcast fairly consistently over the past couple months.

Peter McCormack: Oh, nice one, brilliant! I appreciate you doing that. It's funny, we should say, because I was chatting to Nomad and he said, "You should get a trader on!" I'm pretty sure he recommended you.

Flood: Thank you. Yeah, he reached out to me, and he pinged me. I'm a big fan of Nomad, he was one of the first couple accounts that I ever followed on crypto Twitter.

Peter McCormack: Yeah, I tried to get him on, but he's like, "No, I don't talk." He was the one who recommended it. I was like, "Fuck, have I had a fight with this guy?" Because I know some of the traders don't like me and I was like, "Have I had a fight with this guy? I can't really remember!"

Flood: I don't think so, but whatever, it's in the past!

Peter McCormack: Yeah, exactly. Well listen, look, I appreciate you coming on, all the best with your trading, I hope you continue to crush it. Perhaps one day, we'll meet in person and I won't even know it because you won't tell me. Look, appreciate you coming on and good luck with everything you do man!

Flood: Yeah, thank you so much!