Establishing A Position . . . the Hardest Part of Hodling and Trading
Sorry guys, this took a lot longer than I thought it would. But I think it is worth it for those who have ears and the patience to digest it.
Many large traders become small traders. The purpose of this series or articles is to teach you how a small trader can become a large trader. And what to do after becoming a large trader.
I am a position trader. The hardest part for a position trader is establishing a position. There are good reasons for this. And the first principles I outline here apply whether you are a hodler or trader or both. And that is because you cannot be a bitcoin trader without first being a hodler. (Except on CME and GBTC. So let’s just say it is silly to be a bitcoin trader and not be a hodler.) After these first principles I will expand the same principles to trading alone.
First, trending markets are the exception, not the rule. The rule is choppy markets just like we are experiencing in the Bitcoin market now, not the bull market of 2017.
However, Bitcoin is also an exception. It is an asset with a fixed supply and growing demand. The trend since the creation of bitcoin has been nothing but up, with one giant caveat. It is subject to 60%-90% corrections to the downside.
So what do these dynamics look like?
Well, of the past four years, only one year was higher than the January 15, 2014 peak. Count them:
- $874.71 January 15, 2014
- $210.46 January 15, 2015
- $387.66 January 15, 2016
- $822.42 January 15, 2017
- $13,585.90 January 15, 2018
But looking at bitcoin in that manner also paints a false picture. While bitcoin lost 90% of its value from its 2013 peak in 2014, it doubled in price from its from low in 2015 and more than doubled again in 2016 and rose over twenty-fold in 2017 and was subject to violent downturns that wiped out most margined traders.
I want to also emphasize, both on the way down and on the way up many early adopters abandoned bitcoin, some promoting scam coins of their own creation.
Others who suffered through the bear market gladly sold out for a small profit just to get their money back.
Traders who did not hodle at best made small gains and at worst got completely rket by bitcoin’s volatility. Most traders completely missed out on the bitcoin gains experienced by hodlers. Hodlers by definition are well ahead of the game, and many are “millionaires” based on the fiat dollar standard.
My point is the time to establish a bitcoin position was the three years it was in a trading range. When Bitcoin went up twenty-fold in 2017, hodlers reaped the rewards.
Let me emphasize this point. Hodlers of bitcoin are the exception, not the rule. And 2014 hodlers were finally rewarded in 2017.
In hindsight the rewards of dollar cost averaging is clear, but it required a great deal of patience, discipline, self-education at the time to weather doubts and uncertainties for three long years and the intestinal fortitude not to sell after doubling, tripling or even quadrupling the dollar value of the original position during the explosive rise of 2017.
Can bitcoin double from current levels within a year? Yes. Can bitcoin drop below $5,000 or even $2,000? Yes.
Can it rise twenty-fold? That is extremely unlikely. A repeat performance in 2018 puts bitcoin at $150,000! We are in a trading range and the likelihood is the trading range will continue.
Can Bitcoin rally to 10k-20k and then collapse under 2k? Yes. This would be healthy but scary.
Can we collapse from current levels? Yes. This would be the healthiest price action in the long run.
I bought my first ten bitcoin on Coinbase in August 2013 at $98.00. And had accumulated about 40 btc well under $200 before the end of October 2013 for a total investment of $6,000 which was all my credit cards would allow at the time.
Personally, I netted very little from trading in these three “quiet years.” My focus was on arbitrage (buying bitcoin on one exchange and selling it on another). This is much more difficult to do today with KYC (Know Your Cusmoter) and AML (Anti-Money Laundering) regulations being strictly enforced.
During these three years I had three U.S. bank accounts closed, not because I was doing anything illegal but because my bitcoin activities flagged SAR (Suspicious Activity Reports). Bank of America even shut me down online and I had to threatened suit to get my bank statements. Chase and U.S. Bank handled the closure in an orderly manner. Chase provided no reasons while U.S. Bank acknowledged I was not doing anything illegal, but they simply do not want deal with the hassle of SAR regulations and reporting and thus, closed my personal and business accounts.
Again all this happened during the three years prior to the 2017 price explosion. And it is this regulation and crackdown that provided the fundamental impetus for the 2017 explosion as the bitcoin use case became self-evident for all the world to see. Attempting to destroy the on and off ramps in bitcoin simply enhanced the recognition of what bitcoin is.
From 2014–2016 I was also wiped out by three exchange closures, wiped out on a fourth exchange (an honest exchange) due to a personal hack, plus I got the 33% haircut at Bitfinex. Kraken would routinely blow through orders without providing a fill.
I also got creamed on mining on scrypt.cc after running 40btc to over 120btc. I gave up 76 btc after redepositing when I knew or should have known better.
And Coinbase closed me down without any notice or explanation and in such a manner to cause serious losses in my established arbitrage business. I had to sue them until they finally settled in exchange for non-disclosure of the incident and me agreeing not to sue for any reason in the future. (More on this in a future article.)
While I did very well in these arbitrage years, most of my gains were given up because of centralized exchange failures. While my trading skills reaped large paper gains, the immaturity of the market wiped out nearly all these gains.
Looking back, it is a miracle that I survived bitcoin at all. I made lots of mistakes. I made some huge mistakes! Bitcoin was the Wild West then. And Bitcoin is the Wild West now!! Let me say that again. Bitcoin was the Wild West from 2014–2016. And it remains the Wild West in 2018.
My point here is I never endangered my 40 btc core position. And my initial position was established on credit or OPM (other peoples money). This is not how I recommend you start investing in bitcoin. But I had little choice. I had nothing and so had nothing to lose.
Let me emphasize again that dollar cost averaging and hodling bitcoin has matched the performance of professional traders. If you do not have bitcoin or if your holdings are less that 5% of your total assets, then the best way to establish a position is make a substantial purchase and then dollar cost average every month until at least 5% of your assets are in Bitcoin. These articles on trading are really not for you. Rather go to:
HOW TO ACHIEVE THE SAME RESULTS OF A PROFESSIONAL TRADER WITHOUT TAKING THE INHERENT RISKS
As a former gold bug and self taught economist I first heard about bitcoin when it traded par with the dollar and then…
The remainder of this article assumes that at least 5–15% of your assets are in bitcoin. And if you were a large bitcoin hodler with 20%-100% invested hopefully you used the 2017 explosion to switch half of your position into other traditional assets, a phenomena I call sayvving. As a trader it is known as trimming. Go to:
I AM SAYVVING
At a recent hearing CFTC Chairman J. Christopher Giancarlo famously attributed the bitcoin term “hodl” to be an an…
THE GOAL IS TO TRADE WITH OPM
In the last article about finding the groove I outlined how many large traders become small traders. The goal here is to teach simple principles of how a small trader can become a large trader.
I started out with nothing. N-O-T-H-I-N-G. And closed out 2017 as one of the top ten traders on Bitmex.
In 2002 I was released from doing 11 years in various prisons, from camp to medium security, to criminal the insane asylum (when I discovered due process had been denied for 20 years by the Attorney General Office in parole hearings as a matter of public policy), to maximum security where I was greeted by the White Aryan Nation with “we don’t know who the fuck you are Ugly Old Goat but there is a staff contract on your life so we are watching your back.” And I was escorted to the yard with a gang banger on each side of me. And this was 18 months into my eventual sentences of 11 years. I played dungeons and dragons for real, so bitcoin is really quite tame in the total scope of things.
Incredibly, upon my release it took little or no time to build decent credit by selling Dish Network by phone, door-to-door, and trade booths. Credit should not be used to purchase cars, television sets, or any unnecessary goods and services. My credit was used to purchase auto-dialing equipment which not only provided a livelihood but provided a means to help take down my prosecutor who was now Attorney General.
The key is to limit your exposure (risk) and the goal is to trade with OPM (other people’s money) as soon as possible. But this can take time . . . weeks, months, and even years. This is the way I built a successful business and later invested in bitcoin. It was not until the election of 2016 that my business grew enough to pay off all credit card debt and put the profit into bitcoin.
Just as the initial purchase of bitcoin is a difficult decision and dollar cost averaging in a down market requires great discipline and fortitude, establishing a trading position is several times more difficult. Especially in sideways markets. Swing traders have fared far better than position traders this year.
In examining my own trading, my winning trades this year have nearly all been on the short side. And most of my long trades have been losers. I have essentially broke even for the year and consider it a victory. And I have not established what I consider a position, long or short. Every time I have I was blown away with a smile.
Blowing Out At the Bottom With a Smile
First, let me say that I closed out all my speculative long bitcoin positions with Bitmex on the low of March 18th at…
Further, the upside potential appears very limited compared to the risks. The long and medium term indicators all point that the next major move should be on the downside and a move upside is limited.
Further, my approach is far different than it was in 2013. When you have nothing you have nothing to lose. I now have more than enough things. Enough things to corrupt me thoroughly.
Like Job my life has been restored with a beautiful new wife and family. Unlike Job I am not a righteous man but for what our Lord did for His people 2,000 years ago. And my prayer is and has always been, “Lord Jesus do not restore me if it corrupts me.” And it is evident that I remain corruptible and my restoration is not for my benefit but for the benefit of my incorruptible wife who is my most precious gift from God.
So I am now in the same position as most of my readers, an entrepreneur with a comfortable living doing my best to defend my family against the persistent evil in this world, and putting full faith in what has been promised to come.
Will Bitcoin Break Out On the Upside or Break Down?
I haven’t a clue. And neither does anyone else. Successful trading is not knowing you know where the market is going, but knowing you don’t know and trading accordingly.
I can make an excellent case either way, both technically and fundamentally. All of the technical indicators are bearish and suggest a continuation of he downtrend. Fundamentally, bitcoin is sound but altcoins, ICO’s, Coinbase, and other exchanges are a sword of Damacles waiting to happen which could send short term panic into motion. The case for a break under $6,000, under $4,000 and even under $2,000 is very real.
By the same token, the market has tested but has never come close to breaking the 1st Quarter lows. The market cannot go below $6,000 until is goes below $7,000. The basis also says this market is not going down. And the tight trading range now means that if this week’s high holds, a break above $7,900 will turn most technical indicators bullish.
Being short is a low risk trade right now compared with being long, but doing nothing and sitting on ones hands right now is also an excellent tactic.
Strategy Trumps Tactics
A trader must have the correct strategy to be successful. You can be the worst trader in the world and still be a big winner if you employ the right strategy. By the same token you can be the best technical trader since Jesse Livermore and lose everything due to poor strategy, just as did Jesse Livermore who died penniless from self inflicted ballistic trauma in 1940.
Jesse Lauriston Livermore - Wikipedia
Jesse Lauriston Livermore (July 26, 1877 - November 28, 1940) was an American investor and security analyst. Livermore…
If you are a bad trader, just recognize you are and dollar average or . . . . risk a very small amount of your bitcoin (no more than 5%) to learn trading . . . you may not succeed but your loss is very limited and you have not sacrificed the winning strategy of Hodling.
What I am saying is that many large traders become small traders. The purpose of this series or articles is to teach you how a small trader can become a large trader.
The key is not which side of the market you take or the size of your position. They key is money management.
So whether you are bullish or bearish today really does not matter and is beside the point. The key is the risk that you take and how you handle things once you are in the money trading with OPM. Once you are trading on OPM it is far easier to trade successfully so long as it does not go to your head.
The caveat is exactly that. It easily goes to the head that you are winning because you are so smart rather than giving full credit to where credit is due. . . . that is success is due to the trading principles you follow. And perhaps that is the difference between Ugly Old Goat at 23 and Ugly Old Goat at 68.
Finding the Groove. . .
In my last shorty I outlined the two kinds of successful traders: position traders and swing traders.
Playing the Short Side
Again the long term strategy is to Hodl. Does this mean never play the short side? Well, sort of. It means you should never go net short more than your hodl. And it also depends whether you have the ability and fortitude to weather through a worst case scenario. Essentially your short trading should be trading against the box.
And if you are worried about an imminent price drop then it is a very reasonable to hedge 20–80% of your hodl. If the market does not drop but rises you are still ahead of the game in fiat, just not bitcoin.
Playing the Long Side
Playing the long side is somewhat different. Again, the key is not which side of the market you take or the size of your position. They key is money management or how much you risk. A small position is less likely to test your 5% maximum loss strategy, a larger position will often blow you out only to see the market reverse.
No position should be locked in concrete. No trader is that good. Moreover, trading is dynamic, not static. That said, more often than not a position will go against you initially. In fact, I have found it easier to trade a market when this happens.
When a trade is an instant winner, most likely you hit a short term euphoric market moment that will reverse only to eat your lunch. My buy at 9050 with a stop at 8650 was just such a beast. The market immediately went my way 200–300 points. Normally I would have broken even on such a trade, but because I published it, I stayed with it and took my lumps with a smile.
In most cases a trade will not work immediately. Knowing this, it is a good strategy to keep your powder dry and double down when the market moves against you but keep the same amount of initial risk.
The beauty of this strategy is when it works it can really work.
If you take a position, take adversity, double down and the market moves back to your original buy point you can do two things. You can sell out of half your position and let the rest ride from a position better than the original position or . . . . you can construct a pyramid. A pyramid can work especially well if you are already trading with OPM. If you are trading with your own funds reducing exposure is more prudent.
But a pyramid must be carefully constructed. The number one rule is never construct an inverted pyramid. An inverted pyramid is after buying 5 btc and another 5 btc on the double down buying another 20 btc when the market moves your way. And another 30 btc when the market moves your way again, and so on and so on . . . . one of those mistakes I made as a 23 year old.
A properly constructed pyramid has a solid foundation. My original ten bitcoin purchase at $98 was the foundation upon where I built a position of over 40 btc well under $180. By starting with 10 btc and adding 9, then 8, then 7, 6, 5, 4, 3, 2, 1 the total pyramid is 55 btc.
Most large traders become small traders. Most small traders remain small traders. A few small traders become large traders. The wise large traders start all over again as a small trader sayvving the difference! This is where I hope to take those who have ears.
©This article may be quoted and/or reprinted in full or in part so long as full credit is given and linked to twitter https://twitter.com/UglyOldGoat1