Some thoughts on being a good trader

I have been meaning to write for a while, so at 2am we publish

The key to success, in life as in trading, is the ability to learn from one’s mistakes. This requires three things: recording what one does, reflecting on what went wrong and then implementing changes to decrease the frequency of mistakes.

Record Reasons & Implement Invalidations

But what should be recorded? Your reason for entering a trade - i.e. your thesis and, more importantly, when you will exit that trade. As CryptoCred says, invalidations must be derived from the trade thesis - that is, you must close your trade for the same reason that you opened it. You have to have a connection between opening a trade and closing it, otherwise you learn nothing from that trade. And if you learn nothing from a trade, though it may sometimes bring monetary gain, it is a bad trade. It has been said that a bad trade that makes you money is worse than a good trade that loses you money.

How can losing money ever be good? Well, if you take pride in closing your long - knowing that you have learnt something about the market and/or yourself: that people react to FOMC news before the news is released; that the metagame has shifted; that you shouldn’t open trades when hungry - well, you have made a win in the game of trading. And such little wins compound over time which, performed consistently, grow to monumental proportions. If you improve 1% every day, then you are 36times better by the end of the year; do that over 10 years and you are 360 times better. Thus, as long as you learn from your trades, they are good even if some monetary value is loss.

Patient Planning & Repeated Revaluations

A second primary lesson, is that good trading is hard. Trading is about planning, and having the discipline to stick to that plan. It often requires patience for the conditions envisioned to materialise, and in that time the best traders sit on their hands. So, trading can be boring. Trading requires consistency - doing the same things over and over again; e.g. looking at the same chart. It is important to have plans so that when you are emotionally affected by market moves, you can let a rational system do the thinking for you. Your theses and invalidations are your plans. Write them out and repeatedly revaluate them. Even if your views stay the same, they need to be subject to scrutiny in light of changing market conditions. A good way to ensure you are doing this is to ask: if I sold all my bags, would I rebuy them at these levels? If you wouldn’t then you may want to consider whether it is time to exit soon.

Whilst being patient, one should look for two things: exuberance and depression. When people are feeling euphoric - it is time to sell. When people are depressed - it is time to buy. The markets are the same as they have always been, there are periods of optimism where speculation drives prices far beyond their fundamental value, and then periods of pessimism where fear drives prices far below their fundamental value. The key moment for a trader is the deviation between price and fundamental value. Those moments aren’t always present, but be patient and they will inevitably appear.

Exponential Edges & Fungible Foresight

Finally, a trader must have an edge. They must have something that gives them the confidence that they can beat other people in a trade. As LightCrypto explains: picture where you are in the human centipede of information, evaluate the quality of that information - how many more people know it? And how many people are likely to act on it after you do? Getting information early is an edge. But other edges also exist. To be successful, in trading as in life, one must find their edge; work relentlessly to hone that edge and then consistently apply it. Edges are what give people incremental gains over others; and over times those incremental gains become exponential. Other examples of edges might be: an understanding of communities, an understanding of founding teams, an ability to read code to audit smart contracts, the ability to enter low liquidity environments, the risk tolerance to trade illiquid NFTs.

On this last point, I think I stumble across an edge that is suitable for me: NFTs. NFTs are here, and they are here to stay and they are decoupled from the raw speculative spirits of fungible coins. This is because the “memes” of fungible coins are trendlines, MACDs and RSIs - indicators which are soon to be obliterated by harsh macro conditions (stagflation) which mean that fungible coins will follow suit. Whilst technical traders cut themselves trying to trade these conditions, the memes of NFTs might nonetheless prosper. Because those memes are less technical and more visceral; they concern human emotions at a raw level: Does this picture look nice? Does this project have a community? Does the artist have popularity? The fundamentals of NFTs seem like they are the best contender for decoupling from the approaching harsh conditions of these PvP crypto markets.

NFTs Next

Thus, I will endeavour to build an edge with NFTs. My next article will be on NFTs, it will be based on other articles and discuss the lifespan of popular projects. In building this edge, I will: devise theses for why I enter an NFT play, have clear invalidations for any NFTs I own and battle through the boredom of the articles I’ll have to read and the history I’ll have to analyse if I am to develop a profitable edge.