TRIAGE FOR THE LOSING TRADER: STOP THE BLEEDING

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Download here: Triage for the Losing Trader: Stop The Bleeding

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Stop the Bleeding Now.

  1. Do not trade with leverage until you are consistently profitable.
  2. Put 50% of your portfolio in BTC/ETH cold storage and do not touch it.
  3. Do not put more FIAT into crypto to “make back losses.”
  4. Do not put money into crypto that you cannot afford to lose.
  5. Hold your altcoin bags or convert them into BTC cold storage.
  6. Read this paper carefully and in full.

Preface

This paper is written for those who have lost significant money speculating in cryptocurrencies. It describes their typical situation, discusses common mistakes, and suggests ways to avoid unnecessary loss in the future. This paper does not give financial advice. It is a collection of common and generic investment guidance, fitted for the cryptocurrency space.

Background

The parabolic run up of late 2017 brought many new people into crypto. Many of these speculators had never independently purchased a financial asset in their lives, and many had little to no plans for their crypto purchase. There was no strategy to their entrance and no plan at all for their exit.

For these New Speculators, who will be referred to as NS, the lack of planning resulted in emotional decisions entirely driven by fear and greed. Many NS profited well from whichever part of the 2017 run up they were able to enjoy. However, this lack of planning and strategy led to a painful fall as bitcoin corrected from parabolic highs.

It is likely that many speculators began in cryptocurrencies with value investments, but then began trading to make up losses as Bitcoin began a dramatic correction. The switch likely began at a point of capitulation; instead of pulling investments into FIAT and leaving cryptocurrency entirely, trading appeared to be a better solution. For these NS, this was effectively a double down strategy. Unfortunately, this irrational decision to “cut losses” on value investments was the first of many poor choices. Now months into the Bitcoin correction, we suspect NS double-down trading has resulted in even more losses. It is much harder to trade in a bear market than a bull market – this only adds to the challenge of learning to trade properly in the first place.

What should the NS do now? Hit hard by value-investment USD losses and further losses from trading, the current situation for the NS seems discouraging. There are countless trading resources and producers of media content that claim educating one’s self on how to trade profitably is the best solution. However, we believe it is more important to learn to stop losing than it is to learn to start profiting. This paper intends to offer concrete steps that can be taken to minimize losses going into the future.

“One must stop losing money before one can learn to make money.”

Analysis of Losing Practices

We put a few steps titled “Stop the Bleeding Now” at the very beginning of this publication to emphasize their importance. These concrete steps can serve as triage to cut losing practices immediately; however, they will not reverse deeper trading psychology issues common in new speculators. An NS who realizes that they are bleeding money and Satoshis should employ those stop-gap measures listed in “Stop the Bleeding Now” before moving on to this section to understand the more complex and fundamental flaws of their trading thus far.

Unfortunately, it is very likely that new traders’ losses have not been due to bad luck, but rather due to poor judgement. Therefore, the NS must fix their judgement process instead of taking more chances. The NS must immediately stop the bleeding caused by irrational habits and mindsets.

We believe that the largest problems for the NS are:

  1. Leveraged trading
  2. Over trading
  3. Doubling down
  4. Capitulation

These four mistakes must stop immediately. If you are not yet consistently profitable, leveraged trading should be completely off limits. It will only speed up your losses. Even many consistently profitable traders do not use leverage because crypto is already risky and volatile enough for their tastes. Even using leverage to merely short (2x and higher) is unnecessarily risky and will also accelerate the losing trader’s losses. Why short when you are not yet successful at protecting your capital by holding USD/USDT during crypto corrections? Leveraged trading in any form does not make sense for a trader who is not yet consistently profitable.

The second mistake, over trading, also causes much loss for NS. It has been said by many skilled traders: day trading is a skill to be learned only after swing trading is mastered. Trading frequently not only increases the number of losing trades taken by the NS, but also tends to make the trader too focused on the very short term. Focused on the small picture, NS are more exposed to loss due to fear and greed. Bitcoin’s fluctuations are frequent and aggressive, fueled by smart manipulators taking advantage of dumb retail users. Sharp moves frequently capture greedy traders at the top of spikes (dumb retail FOMOs into the pump) and causes fearful traders to capitulate at the bottom of dumps, right before the next rise. Because the NS is controlled by fear and greed, and because they are bad at sticking to stop losses and other risk management tools, more NS trading only means more NS losses. Learning to trade properly can be done on paper or with very small and infrequent positions. Overtrading as a losing trader leads to more losses.

The third way that the NS loses money is by doubling down. Doubling down is simply exposing oneself to further risk in order to recover from a loss.  As touched on before, the initial decision by the NS to switch from long term holding to trading was itself a double down tactic. It is worth noting that the advisable strategy of Dollar Cost Averaging could be called doubling down. However, DCA is different from the sort of doubling down we advise against. DCA is a strategy made and followed for logical reasons; doubling down on a losing trade in an attempt to make up losses is a rash and emotional decision. Doubling down is often paired with using leverage. The NS might have raised their leverage to buy further into a losing position instead of using a stop loss. Irrational and emotional double down decisions should stop immediately.

The final pitfall is capitulation. The more the NS feels like capitulating, the closer Bitcoin is to ending its pullback. Bitcoin will rise when sell pressure is exhausted, when there are no more weak hands to flush out, and when the NS has finally capitulated. Urges to quit cryptocurrency indicate that a bottom is coming soon, because sellers are limited and buyers are patiently accumulating. When the NS wants to quit, chances are that many other NS are also thinking of doing so. Because we know the NS are the worst traders, they will be the last to capitulate. Therefore, when an NS feels like quitting cryptocurrency, they should be aware that there is a higher-than average chance that they will be leaving close to the bottom of the correction. The NS should keep careful watch over their emotions, and not capitulate towards the end of a correction.

Now that we understand some of the most fundamental issues plaguing new speculators, we can backtrack and explain the triage steps of the “Stop the Bleeding Now” section that started this paper.

Explanation of “Stop the Bleeding Now”

The suggestions to “Stop the Bleeding Now” were:

  1. Do not trade with leverage until you are consistently profitable.
  2. Put 50% of your portfolio in BTC/ETH cold storage and do not touch it.
  3. Do not put more FIAT into crypto to “make back losses.”
  4. Do not put money into crypto that you cannot afford to lose.
  5. Hold your altcoin bags or convert them into BTC cold storage.
  6. Read this paper carefully and in full.

The danger and folly of trading with leverage without a proven, profitable trading plan and practiced execution has already been discussed. The recent widespread use of leveraged trading by losing traders, especially through Bitmex, alarms the HoC team to the extent that we list leverage as the first practice to be stopped in triage.

The second suggestion, to put 50% of one’s portfolio into long term, cold storage as BTC and/or ETH serves two purposes: first, because of the high probability that the NS began their cryptocurrency experience with a plan to hold major coins long term, we suggest at least a partial return to the original plan. Second, this 50% hold serves to stabilize the losing trader’s freefall; ideally, losing traders would hold as much of their portfolio as possible, trading with a miniscule amount for the learning experience. However, we realize that many losing traders are very determined to make up their losses with trading, and that they would view holding everything as realizing Satoshi losses, or “throwing in the towel” in a manner of speaking. For this reason, we suggest a 50% hold up front to save NS from as much future trading loss as possible, while also convincing many other NS to consider utilizing this triage step.

The third suggestion, to not inject more FIAT into one’s crypto portfolio, is the product of simple reasoning. Beginning with the assumption that the reader is a NS who is also a losing trader, there will be no financial reward for trading with more money. The only benefit for continuing to trade would be to learn and progress to a point of profitability; however, adding more FIAT does not aid in the learning process. One might object that having a good amount of “skin in the game” is important to maintain the psychological conditions of pressure that a trader should learn to operate in – however, we do not believe that this supposed “enhanced” learning experience is worth further concrete losses. Therefore, adding more FIAT into cryptocurrency would be, for the NS, only an opportunity for deeper losses.

A second major objection would be to suggest that the NS add FIAT into crypto in a purely cold-storage hold strategy; the thought being that the majors will surely rise in the medium and long term, and so a simple increase in hold positions will expedite the NS’s recovery. However, we also advise against this tactic. The typical NS has demonstrated to themselves on two separate (and significant) occasions that they are not yet disciplined with their cryptocurrency money management: in the first instance, they moved from their original hold strategy towards trading in a clear departure from their original intentions. In the second instance, the NS demonstrated through consistent losses that their trading is controlled by fear and greed, rather than discipline. Therefore, the NS should not embark on a new tactic of additional holding because it requires a level of discipline that the NS has lacked in two recent and significant occasions.

The fourth suggestion, to not put money in cryptocurrency that one cannot afford to lose, is an extension of the previous suggestion. If the NS ignores warnings not to add more FIAT into cryptocurrency, we want them to absolutely not add money that they cannot afford to lose. Money needed for day-to-day expenses, education, child care, debts, and or periodic payments must not be tied up in an asset as volatile as cryptocurrency. On top of this, adding money into crypto that one cannot afford to lose only further demonstrates a lack of discipline; somebody that cannot refrain from such a grave mistake should entrust their savings with professionals (such as Schwab Intelligent Portfolios) and should certainly not trade cryptocurrencies.

The fifth suggestion answers the common question of those who bought altcoins near their all-time highs in the late 2017 run-up, namely: “should I cut my losses now?” There can be healthy debate over the best course of action, however our suggestion is to hold altcoin bags. This appeals to the principle that losing traders should trade small while they learn. Trading small means avoiding more large trades, such as trading a large bag for BTC or for another alt coin. If the NS has shown themselves that they are not yet a profitable trader in USD or Satoshis, why should they continue to trade with a substantial part of their portfolio?

In the case where the altcoin bag the NS holds is causing the NS considerable mental stress, then converting altcoin bags into BTC long term cold storage is perhaps also an acceptable option. However, this move must be made with a certain mindset. In the future, buying back that altcoin should be completely off the table. We want the NS to stabilize their trading free-fall, not continue to trade huge positions. Allowing even the possibility in the NS’ mind to buy back that altcoin bag makes this conversion to BTC cold storage not a stop-loss, but just another trade. Leaving a buy back on the table as a possibility opens the NS to feelings of FOMO if the altcoin experiences any sort of upward movement. If the NS is determined to stop their altcoin trading loss with a conversion back to BTC, it should be once and for all (at least until they are consistently profitable).

The sixth suggestion is to read this paper in full, and so a conclusion here is fitting. If upon reading this paper even a single new speculator protects themselves from further losses, then the authors and HoC team will have done the community some good. Going forward, remember that trading is a zero-sum game: one person’s gains are another’s losses. Therefore, trading moves money from the pockets of the inexperienced and undisciplined to the pockets of the experienced and disciplined. Because new traders begin on the losing side of the generalized system, their primary goal while learning should be to minimize loss. Remember that profits will come only after learning.

“One must stop losing money before one can learn to make money.”

Contributed by Keaton Lee (@Keaton#5269).

If you liked the material here and you would like face-to-face help on Triage and learning to save yourself from yourself, you can purchase a one-on-one with the author here.

>>>Part II – The Portfolio
>>>Part III – Coming Soon