What Bear Market? Trading Wisdom from the Trenches

This article is an assortment of mental models and frameworks I've developed and relied on throughout the span of my trading career, with some personal anecdotes mixed in.

Originally written by Resonance. Adapted for CryptoZink

I am privileged to have traded during the depths of the bear market and the gilded age of up-only, with the latter multiple orders of magnitude more profitable. The heuristics below are not regime-specific, and I hope you will find them as helpful to you as they are to me.

The Power of Being Flat

Being flat is an abstruse concept in today's "cash is trash" zeitgeist, but any competent trader will tell you this mentality is foolish. If you do not have an edge, go flat.

Back in May when $100K BTC was in vogue, I was quietly exiting stage left. By sheer luck I had finished derisking the entire book a day before the May liquidation gala.

At the tail-end of the liquidations, I saw a massive opportunity – SUSHI apes who were levered to the hilt on Binance became forced sellers resulting in fire-sale prices. In a single 30-minute candle, the price had dropped 66% – the drawdown was 50% more on Binance than FTX!

I bet big during the price dislocation. The discount proved to be fleeting, and by the next tick it had retraced the entire liquidation candle. This remains the best trade I've made to this date in terms of $ made/time.

A flat position gives you invaluable optionality and allows you to take very asymmetric bets during periods of distress and hysteria. Flat is sometimes a good position.

Respect Momentum and Trends

Do not fade momentum and trends, no matter how incoherent or improbable you perceive them to be. Crypto is intrinsically one of the most reflexive asset classes, with some subsectors more reflexive than others due to cleverly-designed ponzinomics.

Bet big during uptrends. Conversely, never knife-catch when a trend reverses – that is a quick way to financial ruin. Reflexivity cuts both ways, but always sharper to the downside.

Calling tops and bottoms is a trivial exercise that should be reserved for the egoist. The real trades are made some time after the minima/maxima is formed.

Account for Tail Risks

In any trade setup, always account for tail risks. Risks in crypto are far from normally-distributed. If you do not, your EV is likely negative on a large enough time scale. Think Turkey paradox/March 2020.

Paradoxically, these tail risks are cheapest to hedge at precisely the times when the need is greatest. A lot of instruments frequently "misprice" probabilities of 3 sigma moves (>>0.3%), so take advantage of this.

If you feel exceedingly assured about how a trade will play out (you put them at more than 80% odds internally), then it is likely you need to reevaluate your thesis and/or reduce sizing.

Absent non-public information (private fundraise, catalyst), having unduly high confidence about how chaotic processes "should behave" likely stems from incorrect/incomplete facts. My best trades have been < 65% probability. You think there's free money in the market?

The same goes with people who use overwhelmingly deterministic language (shitposters exempted). Readers beware.

Stay Flexible, Avoid Attachment

Do not be married to positions. Excepting very high timeframe positions or you want to dump on your followers (yikes), avoid heavily broadcasting/shilling your positions.

Psychologically, this anchors your bias and makes you inflexible. Good traders can flip on a dime as new information comes in. Stay nimble and adopt a Bayesian mindset.

Let Go of "Could Haves"

Metrics like peak net worth and unrealized PNL are nothing but specters of the past. Benchmarking your performance to "could haves" often leads to emotionally-driven/revenge trading. Play the odds according to the hand you're dealt with right now.

For beginners who cannot cut losses, close your positions and immediately reopen them. Your PNL on that position resets, and this exercise helps to clear biases from loss aversion. Still want to keep them on?

Substance Over Style

Do not conflate rosy prose and rhetoric with skill. A poor idea wrapped in gaudy verbiage is still a poor idea.

Curate Your Information Diet

Be mindful of what you read and who you follow. Garbage in, garbage out.

This is especially so with people who sell subscriptions or newsletters for a living. Think on-chain analytics and trading gurus. I trade for a living, and the idea of selling my alpha for pennies on the dollar is revolting. They still make great follows though!

Additionally, with macro risks now intertwined with the crypto complex, we are seeing a lot of parochial macro takes from day-trader turned macro experts parroting consensus views to portray a facade of intellectualism. Pay no heed to them.

Plot your favorite thought leader's shills against a price chart. You'll likely be surprised at the results. Some have true alpha, but not in the way you think :-)

The best public alpha leaks are often vague/thought-provoking in nature as compared to obtuse instructions (long at A, sell at B). Refuse to be spoonfed facts, DYOR instead.

Avoid Echo Chambers

Crypto Twitter inherently gravitates toward being an echo chamber where maximalism is rampant and opposing views are frowned upon lest you find yourself the target of vicious frog armies. Social media platforms are incentivized to foster homophilic effects (filters/curation).

Actively fight against this by including a disparate mix of astute skeptics and optimists in your reading list. Arguments that resort to strawmanning/ad hominems are easy to see through.

Value Your Time Properly

Your time isn't quantifiable by money except in very narrow scopes. Just because you made $10M last year (~1K/hr) does not necessarily mean it's no longer worth doing things that don't have the same economical payoff.

It's still worth lining up for that burrito instead of wanting to buy the whole stall. Allow your mind to slack and wander – boredom/idle time improves creativity and widens perspectives, something you cannot place a dollar sign on.

The Democratic Nature of Crypto

The rise of crypto is ostensibly the most globally-inclusive revolution/transfer of wealth movement in our generation. There has never been a more non-discriminatory way to break free from the chains of serfdom.

Ironically, information from the best sources cost nothing and is easily accessible.

You don't need high-placed connections, millions in starting capital, or years of experience before you can succeed in crypto. Be brave enough to bet on yourself.

Know Your Edge

Understand what your edge is and always work on improving it. Are you a byproduct of an up-only market cycle and now a victim of illusory superiority? 80% of traders lose money when studied over a 12-month period. Don't trade with substantial sums if you don't have an edge.

A corollary to the above is to work within your circle of competence. To venture beyond it is no trivial task. "The size of that circle is not very important; knowing its boundaries, however, is vital."

Learn to Code

Learn to code. It's a huge multiplier effect, comparable to having an army under your command. Pick up NodeJS or Golang to run your scripts and Python for analyzing/backtesting data. Cost of learning material is negligible, will be the best financial investment you can make.

Final Thought

Never say never.