A litte about my background first...I was Head of Rates Trading at CG Capital Markets. Before joining CG Capital, I spent almost a decade trading US Treasuries and building out a successful institutional analysis and fixed income trading business. I have covered all the primary dealers, large buy-side money managers and hedge funds. My financial career began at Charles Schwab as a trader in the equity and options markets before moving to the sell-side to trade fixed income at vFinance, JVB Financial, and CG Capital. I also hold a bachelors degree in Finance and Business Administration from the University of Colorado at Boulder.
With the recent news in Bitcoin lately, all of this fear, people call it FUD but i don’t really like that term. Uncertainty and doubt is something you should never have as a smart trader. You have to embrace the chaos. You wake up expecting risk. This idea that you are only going to take risk when you are certain couldn’t be farther from the truth. Let’s just get this clear, you will never be certain. The day you feel certain is going to be one of your biggest losing trading days.
I thought this price action the last day would be a good opportunity to explain not only how you should be managing your core long trade right now, but to also let it serve as a lesson in the psychology of trading. This lesson is what I call “letting the market take you out of a trade”.
Psychology is critical in trading and investing when you’re taking on risk. What ends up happening is that money creates a lot of emotion for us as humans and the fear of losing money plays right into them. If you’re not aware and careful, those emotions can drive your trading decisions. As traders, we need to remove that emotion from the equation.
I can tell you from experience, the feeling you get when you have a lot of risk on and the fear that is associated with losing money can be absolutely paralyzing. I’m sure many of you have felt the same way at some point with your trading. I remember back when I was trading Treasuries. I’ve been on the bid in the Treasury market for $200 million 10’s, started getting filled, and I’ve had screens go down where I didn’t even know my position. I have had customers who I planned to sell my position to cancel their orders. Other times I’ve been filled on $1 million, $3 million, $5 million lots so quickly that it was just impossible to add up both screens and figure out my position (we actually used a dedicated back-office staffer for this) and then the market starts dropping. When you buy a $50 million or a $100 million dollar position and the market starts dropping on you rapidly or your screen drops, the simplest things like being able to count up your fills and total up your position is hard to do because the fear is just paralyzing. You literally cannot do simple math.
There’s a lot of emotion involved once you get inside a trade like that. It’s no different when we’re trading Bitcoin. I see a lot of emotion come out when we get to big points in the market, which is totally natural. As a trader, you always want to work on yourself and you’re always trying to get better. That’s what I love about trading — it’s a lifelong process on getting better and more disciplined. There are so many things about yourself that you can work on to help you be a better trader.
The easier thing to do when you’re trading is take the “you” out of the equation. This means taking your ego out of the equation. It’s much easier to trade without emotion. One of the ways to do this is removing yourself and then letting a trading model or a process take over. My trading tends to be much more mechanical because I’ve gotten to the point where I use my model and I constantly ask myself things like:
What does my method say? What’s the chart doing? What’s the process here?
By doing that over and over, I don’t get emotional about trying to figure out where the market is going. If you often find yourself saying “I think Bitcoin is going to double…” or “I feel like Bitcoin is going to crash this far…” — you are doing way too much thinking using too much emotion. It’s your ego that says those things. When you start building that into your mind and energizing an idea like that with your emotion, you are going to ignore so much of the other market information that’s coming back at you. The ego is going to take over and you will defend a position, an idea that you have emotionally charged, “I know I’m going to be right”, “This has to happen”. When it doesn’t happen, the human brain will actually start to defend these ideas and you will start to block out the other information that’s telling you you’re wrong. As a trader, that’s where I see so many people blow up accounts.
One way to minimize this issue is to constantly be aware and try to monitor your emotions, but it’s easier just to let the ego stuff go, just get rid of it. You don’t need to work on changing yourself — we all have different personalities — but just leave the ego aside and let the model trade.
We can tie this into deciding when to exit a trade. Your decision could be based on fundamentals, a news story, or something else that happens and changes your mind, leading to you deciding you need to get out. It gets to the point where you will talk yourself out of a position. I call that “you” taking yourself out of the position; the ego is taking you out, not the market.
I have several strategies for getting out of a position. There’s different trailing stop methods you can use, but one of the most powerful is obviously just staying in until the trend breaks. If we want to play something long, we’re going to play that 80%-90% of the time with the current uptrend. Some of you who have been out of Bitcoin for whatever reason you’ve created, that’s the ego. So now you don’t know what to do at the highs because it’s already had a good run. You really shouldn’t be buying right in front of the all-time high resistance.
When I’m trading longer term, my mindset is I have a core piece that I will never sell. For example, back in the 80’s where you bought Apple with the mindset that you would never sell it. You would be glad that was your game plan. Some people, after it doubles or triples, they say “oh that’s it, I gotta get out of everything” and then they lose their position. These markets will tend to run farther than you think. $25,000 is a good price target on Bitcoin but what if it goes crazy and goes to $40,000 first before we have a big correction or a big bear market? Instead, we need to have something happen in the market. The trend needs to break down or there are some sort of metrics that take you out of the trade completely, not just you deciding to exit. The market gets to decide or a trading process gets to decide.
In my trading, I don’t get out of a position until price breaks trend. For me, I can see that on the daily or weekly charts when I’m talking about the longer-term. Simply put, the weekly chart of Bitcoin clearly shows price has been making a series of higher lows and the direction of the 8 period moving average is still rising. You’re not going to get me bearish or completely flat Bitcoin unless price takes out the higher low pivot and takes out the bands, all the way down. I will get heavier with my position at certain points. We recently got more aggressive and have taken some profit into the highs, but I’m not going to get out of my entire position until it breaks trend.
Techniques need to be learned. Some of that also comes from experience. I’ve been there so many times, where I’ve exited a position because I thought the market was done going up or picked some magical point in time and on the chart, that it should stop going up and it just keeps going and going. Those are some of your biggest winners because no one can believe how far the market went. They start shorting it, and then it takes out the shorts and just keeps going and going but you’ve lost your position because you just decided when you were going to get out. A simple thing that you’ve got to start thinking. Let the market take you out. You shouldn’t be ending the trade — the market, something in your process, the price action changes and it does something on the chart — that’s what gets you out. It’s not your decision.
