Author: Kaloyan Roussev
Date: 17 February 2018
Do not make investment decisions based on this article – read the disclaimer before you proceed and leave the website if you disagree with it.
I’ve been trading cryptocurrencies for a year and a half, and I’ve read about 20 books in the meantime. Always experimenting, trying dumb things sometimes, I learned a lot, but I am still a complete rookie.
I made 2.5x on my investments in 2017 which vastly underperformed the cryptomarket, but who was to know that the entire market will grow by hundreds of percents in a year? I traded against myself a lot, made very stupid mistakes, but I made sure to extract knowledge and experience from all this.
Now that I am considering Global Macro as my next area of investing/trading endeavors, I am going to transfer my knowledge over (where applicable) and since I’ve been reading tons of books, I started taking notes, in order to create a system for investments. I am going to check the list of notes before placing a buy or sell order to always make sure the trade is in accordance with my system.
1. Always buy uptrend or trend reversal
I like an asset for whatever reason (crowd analysis, fundamental analysis, value analysis) and I believe in its mid term and long term growth and success. So it doesn’t matter for me that much at what price I enter the trade, because in a year from now, when it supposedly does a 10x, it won’t matter, will it? Wrong. I don’t control the price movement in the future, and as much as I believe it will explode, the odds are it wont. What I do control though, is my entry price. So there’s no need to buy in a clear downtrend and take those initial losses, just because I think in the long term they wont matter – first of all the long term uptrend is not guaranteed, second of all, if I need to urgently liquidate, I am going to suffer. So I should take mytime, and wait for the downtrend to consolidate, or for a clear trend reversal pattern (or public sentiment reversal) before I buy into that asset. Yes – buy low and sell high, but buy bottom that has started showing signs of a reversal, rather than just blindly buying something that is low today, compared to yesterday – because it might keep going down. So I will first wait until it bottoms out, before buying.
2. If I can, I should try to buy when RSI shows “oversold”
One of the hedge fund managers in “Hedge Fund Market Wizards” claimed that RSI overbought is not a reliable measure, but oversold is usually spot on. So,when identifying a trend reversal (from bearish to bullish), checking the RSI to see if the price is below the level that indicates that the asset is oversold,won’t hurt, as it will add one more indication to my list of convictions in the trade, and might increase my rate of success a little.
3. “Cut your losses early and let your winners run”
I’ve always thought this was bullshit advice and I’ve never practiced this mantra. My thinking went – you don’t register a loss until you sell. And the price will eventually go in your direction. Well, there are three problems with that (at least) – first of all, if the price goes down by 50%, mathematically, it will have to go up 100% for me to break even! (10 drops 50% to 5, then 5 must double to get to 10!); secondly, if I place a position I expect the price to go up – and if it doesn’t, that means I was wrong – if it goes up again in the future, it could be for different reasons than the one I anticipated which would mean I got lucky – and I can’t rely on luck; and thirdly – getting “married” and emotionally attached to a trade is a source of lost opportunities – because while my money is locked up into a losing trade, other high-conviction great upside trades might pass me by and I won’t have anything to put into them.
Also, isn’t it great to know that you are ever only going to lose 10% if you are wrong? I’ve lost much more not following this tactic, and I’ve sold at large losses when the pain has become unbearable or I’ve needed the cash for another great idea (usually when trying to make up a large loss, a great idea is manufactured, even if its not that great in reality)
On the other hand, If I cut my losses early, I will learn to admit that I am wrong. The small pain of the small loss is going to enhance my ability to remember what I did wrong, and I will learn better. I will also be able to reevaluate what happened and rethink my trade and possibly enter at an even better price, or buy something else.
Regarding letting winners run – when to take a profit – I watched a lecture by a South African trader who says that he always takes profit when his trailing stop loss is hit – which means that he moves his stop loss along with the price increase, and keeps it relatively close. This way he locks up more and more of the uptrend and when the price start moving against him, this might be a pretty good indicator for a trend reversal (although it might be a dip or a mean reversion) – so that’s a good place to take sure profits, instead of trying to chase the top and predict where it is.
4. Never buy after a huge spike
Now that I’ve been looking at charts for long enough, one of the most certain things in trading is that the price will almost never go up, a little after a huge spike. This is the worst time to place a buy order. Especially if I’ve missed the bounce RIGHT after the spike downturn.
5. Never buy up the sell book of a small market cap asset, hoping to start an uptrend
Sometimes a low volume order book or a recently listed “penny crypto” has very thin sell orders, which if bought up, could double the last price.
First of all this is considered market manipulation, second of all, it doesn’t work at least 80% of the time. This is what “whales” do in larger markets with huge amount of cash. The price goes up, then some traders appear out of nowhere and start placing sell orders much below the last artificially inflated price. More and more of those traders start coming in with their low-ball sell orders and you are left standing there with your expensive bag of shit, you greedy fuck. I’ve done this stupidity 3 or 4 times, and it only worked out once – I started an uptrend and sold later on at better prices. It worked on a small market cap crypto that was only trading on one exchange and there were no fundamental news around it so the only thing people had to rely on, was technical analysis, and when they saw the price move up, the trollbox people went nuts and the price kept on rising.
6. Never buy low volume assets
Liquidity is very important. It draws attention. It starts bullish trends. It tightens the buy/sell spreads. It reduces slippage. It allows traders to get in/out quickly, if they have to/are forced to. Low volume means that a large position should either wait for a long time in the order book, or if selling is really urgent, slippage eats away a lot of the money, and the seller ends up very badly hurt.
7. Never buy into or before sell walls that are bigger than 10% of the daily volume
The number is completely arbitrary. Even if the long-term prospects are good, there is no reason to enter a position against a big sell wall which means that there is a big enough chance for the price to hit resistance (or the sell wall) and go down in the short term. I should just wait it out and aim for an exit at a lower price.
8. Average out at pull backs
Another rendition of the “let winners run” philosophy is to take out 50% of my profits when, after an uptrend, the price pulls back by 10% or more, and keep taking profits out, if after the pull back it starts rising again and then it pull back again. If, after the first drop, it keeps dropping, liquidate the entire position.
9. There is no reason to buy highly correlated assets
When two assets move up and down in lockstep, buying both makes little sense, as this is not true diversification – it is almost essentially the same position, but twice the trading fees. It only makes sense to buy uncorrelated or inversely correlated assets – 20% in each, 5 positions, for example. Ray Dalio has this “all weather” portfolio of uncorrelated assets – each of which performs well in one of the 4 types of economic conditions. When he has all of them in his basket, his portfolio is almost never down.
10. There is no reason to trade when I don’t have a great idea
I’ve always had the urge to put my cash into something as quickly as possible. Right after I’ve sold an asset, I turn around and get into something else. It burns a hole in my pocket. This is very stupid. It is called overtrading, and is counterproductive and a losing strategy. I should wait on the sidelines, have free cash on hand, and only get in a trade when I have a great idea. It is not necessary to always be invested in something just for the sake of being invested. Being invested is a means to an end – to make profits, not the goal itself.
11. The 10x times might be over in Cryptocurrency, so it might not be a good idea to be all in on one asset
2017 had spectacular gains, but now we are either in a downtrend or trading sideways. So many ICOs came out that people got accustomed to it and it is not something new or exciting anymore. The market is maturing and with more maturity comes less volatility, which means the chances that something will 10x are slimmer now, so it might be a better idea to be invested in 5-6 assets , 15-20% each, rather than being 100% into a single asset. That way the exposure to a possible multifold increase in at least one of them, is bigger.
12. Market leaders always have a bigger chance to perform. Might be a good idea to have at least 15-20% of my portfolio in a top 5 asset, preferably bought at a dip.
I am a fan of small market cap, “undervalued” assets, but 2017 showed that branding plays a huge role in cryptocurrency too, and the first-movers kept performing at a remarkable pace (bitcoin, ether, ripple) so it is a good idea to be riding that wave too. They are also the ones that have a bigger chance to survive a crypto bubble burst (the way Amazon was the one of the few survivors after the dot com crash)
13. [Stocks] The DOW/S&P500 supposedly move no more than 400 basis points per day
One of the hedge fund managers in “Hedge fund market wizards” noted that according to his observations, the market rarely moves more than 400 basis points in a single day. This might still be relevant today and it could be used as a small something to take into consideration for those in stocks. (This month the market had 600-1100 basis points moves that startled everyone).
14. [Stocks] In bull markets, the day almost always closes higher than it opens. In bearish markets the day almost always closes lower than it opened. When this is not the case for several days in a row, it might mean that a trend reversal has started.
This is another observation by the same hedge fund manager.
15. Use mental stops rather than automatic stops, because automatic ones can get triggered by noise
If I know where I think that if the price goes, it must mean that I was wrong in my trade, I would put a mental stop loss there, not an automatic one, if it is less than 10% away from current price, because I might still be right and the price might very soon start going up, but a single trader dumping their stake for whatever reasons might create enough “noise” in the chart, as to trigger the automatic stop loss and cause me to lose money. The downside of mental stops is that I have to watch the chart frequently. And also – register a larger loss in the case of a sharp downturn (unless I decide to wait it out)
16. Don’t use only technical analysis or only fundamental analysis
Technical analysis only accounts for past movements. It doesn’t know about a huge positive or negative event that could happen in the future, of which some insiders or thorough researchers might be aware. Fundamental/value analysis on the other hand, isn’t very concerned with crowd sentiment which is more than well represented in technical analysis. The combination of the two is very powerful. Yes, technical analysis is to some extent chicanery, especially when you try to use fibonacci retracements to predict the future, but it has some excellent and valid indicators such as order books, market depth, buy/sell walls, RSI, clearly outlined trends etc. So it is perfect to time and size a position when expressing a fundamentally based trade.
17. If something has traded sideways since its inception, it is almost always poised to go up at some point
I bought Ripple at $0.008 and sold it for as much a month later in late 2016. I had noticed that it has been trading sideways from the beginning. And it kept on doing that until it exploded (a huge wash sale committed by its creator). Same thing with Ether. Same thing with all cryptocurrencies that I’ve been observing – at some point, their day comes. The day comes when something happens, or they get noticed by someone, and having never been “milked” they look as virgin territory for a price surge.
18. Always consider the macro trend and the industry/asset class state, before buying an individual asset
Both the technical and fundamental analysis on something can be great, but if I zoom out and see the entire market / asset class being in a macro downtrend, the tactics might be good but with the strategy going downward, it is clearly not a good idea. Being able to see the big picture is very important. Stocks are highly correlated to each other and in a downturn they will all plunge (more or less, and temporarily) no matter how good a company is. Lately, the same has been true for cryptocurrency.
19. Check with my list of rules before entering a trade
Checking this very list, before entering a trade, might keep me in check with my system, show me that I am wrong, or I could time my position better, and will make me learn these items with greater efficiency, as humans learn best, when we have skin in the game. The more of these items check out for a trade, the better my conviction in it will be.
20. [Options] Buy long-term put + call options with low implied volatility (low price) for something that expects a large move further down the road
If an asset has been trading sideways, or in a slightly sloped clear bullish/bearish market with very low volatility, the price of the options on it will be low. If there is an event near the expiration date of a cheap long-term option on that asset, that is going to either make or break the business/asset, and the price might go either up or down by a lot, it is a great trade to buy both the put and the call options. That way, with a limited downside of only the premium paid on both options, one could make a lot of money on the huge price move on either direction, as long as the price move is bigger than the combined price of the premiums paid for both options.
21. In crypto, due to high correlation lately, there are clear pure red days or sets of days. Buy market leaders then (safest choice), and sell them in the almost inevitable purely green days that follow.
I’ve seen this so many times. Another regulatory scare news come out and the entire market plunges, everything is in the red – 5-20% per day, 1-2-3 days in a row. Then, on day 4, literally everything is green again – 5-25% up, and then another green day follows, before everything goes back to normal. I wouldn’t usually bother with such trades, but might be a good idea for some. I am very pessimistic on crypto, so in my opinion, one of those times, it might be only red days from then on.
I would prefer buying the market leaders, because, after people stop being scared, and go from fiat money to crypto again, they are first going to buy Bitcoin or Ether, then either hold those or buy something else with them – but one thing is sure -it all starts with the market leaders first, so those are the safest purchases in such times.
22. Always have at least 10% of my capital in cash, so that I can take advantage of great unpredicted event-driven trades that come my way
I’ve almost never been able to implement this rule, but I will try harder. There are always event-driven trades with great potential profits that come up, and there are money to be made for people who have the spare cash to buy in. Otherwise I would have to liquidate something, and if I hadn’t been following the forementioned rules (to cut losses early, to be involved with highly liquid assets) I might not be able to liquidate without suffering a large loss.
23. Don’t be afraid to go long in bubbles, but have an exit strategy
I learned that I shouldn’t be afraid to go long in bubbles, no matter how far out of whack do I consider the prices to be with the value of the underlying assets. The market’s ability to prolong the life of a bull trend, and ignore common sense and bad news, has always shown to be able to live even a little longer after the price has gone to even crazier levels. So riding a bubble has almost sure profits, especially if one has entered early enough, and selling at the first major mean reversion or correction will ensure that I will be out before the whole thing goes to zero. Bubbles don’t just pop to zero with the price going vertically down, so we will usually have enough time to react. If I’ve bought in at 5000 in a bubble that started at 1000, and the asset keeps going to 10 000 and then the price goes down, to 8000, I still have the time to get out and be 3000 ahead.
24. When the price goes ridiculously high, take profits
I bought ECC when it was 8 satoshi, then it went to 47 almost vertically. Everyone in the trollbox started predicting 100-200 (in such times there’s always people coming out of the woods making crazy predictions), and I was one of those people too. Then I saw it all come crashing down, and it stayed down for 8 months, before it went back up again, but I had long liquidated at a modest profit before that happened. And I know people who didn’t sell Bitcoin at $19 000 because they thought it was going to $50k. Sure in the long term it might go there, but the chart went vertical so it was common sense that it will go down just as fast – it was the obvious point to take profits, and buy back again a little after, to double one’s holdings. The mental regret that follows such scenarios affects our psychology badly and is not a good state to be in. So – always take obvious profits.
25. [Stocks] [Value investing] To determine the strength of a company, use EBIT/EV rather than P/E
This is something I haven’t tried yet, but there’s a great explanation why it is a great idea, well researched back tested and proven in the markets by Joel Greenblatt. He’s had a great success by using it in his systematic quantitative arbitrage fund, so its worth checking out. Here’s a part of the note I took: “Use return on capital, rather than ROE or ROA. EBIT to (net working capital + net fixed assets). Try to buy cheap, but try to buy GOOD companies cheap. And use this metric to find them”
26. A massive vertical plunge is always followed by a dead cat bounce
When Bitconnect was exposed as a 100% scam, and was shut down, the price dropped vertically to almost zero. But then, it bounced back up by something like 15-30 percent, and it kept going up for a couple of days. This is caused, in my opinion, by the fact that bots and cavemen technical analysts, who never follow the news, look at the chart and think “this is a great time to buy”. So because of them, it might actually be a great time to buy for a quick profit (and sell at any profit, otherwise it is dangerous).
27. Buy market leaders and huge companies that are experiencing short term adversity that is not going to affect them long term
Weak hands sell, price for a great company/asset goes down, I can buy then (if they’d become undervalued according to a discretionary type of analysis), and with time they could go up again. It is important to find out that the company reputation will remain in tact, and it will be able to overcome the temporary problems.
28. Buy companies/assets that are going to benefit from an unpredicted major positive or a negative event, right after it happened
Something good or bad happens and largely affects the economy in a way that could make a company either suffer huge losses or make large gains.
29. Mutual funds are worse than popular indexes (primarily because of fees). Popular indexes underperform correctly weighted indexes (i.e. RAFI FTSE performs better than S&P500)
The way indexes such as S&P500 are structured, makes their price more comprised by overpriced stocks because of their higher relative and absolute price, and less comprised by undervalued stocks. There are indexes like the RAFI FTSE where emphasis is put on undervalued stocks, which will outperform the overvalued ones, so the returns are better. So if I have buy an index, I would buy one like that. Again, wisdom by Joel Greenblatt.
30. I should be able to change my opinion instantly and without hesitation. The bottom line is more important than feeling right
If I held the opinion that an asset was going to go one way, but then made the research and it turned out that I started thinking it might actually be headed the other way, I should feel no obligation to hold on to my original opinion, just because I didnt want to feel I’ve been initially wrong. The bottom line is more important. Being emotionally attached to an opinion and being stupid is not a good idea. Here’s a quote from a famous person from the past to back up my claim with “When the facts change, my opinion changes” John Maynard Kaynes. I am saying this with irony, because if you want to back up any claim, you can always find a famous person from the past who you can quote (observation made by Nassim Taleb)
31. My analysis is only good at the current date, at the current price
What might seem undervalued today might already be fairly priced or overvalued the next day. I shouldn’t trade on past analysis, so if there’s some time passed since I analyzed an asset, I should reanalyze it and get up to date with the latest turns of events and the latest opinions, charts and numbers, before entering a trade. If some time has passed since I entered a trade, I should have the habit to frequently reevaluate my trade and consider if the underlying facts and perceived value haven’t changed at this point, and reconsider if I still want to be in this trade completely or partially – and either liquidate, stay in it, or change the position size.
32. If I have the idea that something is going to go down but I am risk averse, instead of doing a dangerous short, I can implement the idea by going long an inversely correlated asset
I got this idea from some guy in the “Hedge fund market wizards” book who was afraid to short the tech bubble, but went long bonds instead, who were going to go up had the bubble burst. He turned out right to not short the tech bubble because it had kept going up, and his bonds purchase did very well when they started failling.
I apologize that there is a disproportionate amount of quotes from the “Hedge fund market wizards” book, but there are two reasons for that – it is a very good book filled with practical advice by very successful hedge fund managers, and also it is only recently that I got into the habit of taking notes. I wish I had started doing that a year ago – I read 24 books since then and my notes list wouldve been much bigger now, and with a larger variety of cited books.
33. Don’t manage other people’s money and don’t be publicly accountable for returns in short time spans
Managing other people’s money can be huge mental burden and can tilt one’s trading strategies. Being publicly accountable for producing returns in short time spans, especially if those time spans are shorter than one’s longer timespan investment strategies, could negatively affect one’s ability to be patient, and to only trade when they have a great idea, rather than being pushed into providing returns in short time spans. If I’ve bought something now, that I believe is going to take a year to appreciate (which is often the case with fundamental and value analysis) but I have to show returns every month, the downfalls in the meanwhile are going to destroy me.
34. Don’t confine myself to only one asset class, because there’s a limited number of great opportunities there
There’s only a limited amount of opportunities in any market within a certain time period. If I only limit myself to equity, or commodities, or cryptocurrencies, I should start overtrading and putting money in ideas that aren’t of the highest quality, just because the money has to be put into something. On the other hand, if I trade global macro style, I have an infinite array of possibilities, because there is always volatility and undervaluation in something, somewhere.
I will keep writing notes down and will post a new article once I get 20-30 more notes.
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