Trader Note

Each trade MUST be evaluated on its merits. If entry is unachievable then scrap the trade.

2017-12-25 Week

NYE. Bitcoin selloff. See: EVENTS

This Week

It is a short trading week. Expect some random big orders (end of year exits) coming into market.

Expect continued selling in crypto currencies, near term, until NEW value buyers come into market.

  

NYE

New Years Eve trading can be lucrative if you are taking short chops. Some traders, with decent size, are waiting to the very last minute to exit trades in hopes of turning them profitable at the end of the year (for bigger bonuses). Some trading houses use the last week of the year to close out their positions and clear their book, if only to start the next year fresh.

The last week of the year can have some interesting orders and rolls come into market that provide good chops. These are spike orders (outsized orders for the market) that give price a fast few ticks in moves. Often, this can make for a good entry / exit if you are tracking price. It can also make for a good scalp if you revert the spikes. So trade the end of the year with caution but expect that these big orders are NOT an indication of price moves and will quickly revert back to the median price.

The first week of the year can be very volatile because markets are superstitious. This is because the market thinks that the first week of the trading year is an indicator of how the market will trade across the year. Manipulators know this and may try to utilize this to their advantage. As such, expect manipulations in market to coax prices higher for the first trading week of 2016.

 

Crypto-currencies

I was going to post this Monday, but thought I'd be lazy and wait for Christmas weekend (being lazy). I apologize if that would have swayed you to sell bitcoin before the dip.

"Sell rhino horns, buy fishing lines." & "Your emotions are always wrong."

- Jim Sinclair, www.jsmineset.com

When you look at the chart for bitcoin, it is obvious that it was a rhino horn. The challenge is to figure out where that spike higher will break down (in this case, $20,000). Gold traders know that your emotions will be fatal when trading, but the traders in crypto-currencies likely do not have the same experience. So while these traders are doubling down at what looks to be a peak price, it would be wise to take out some profits and wait for the dip. Invariably, there is always a dip.

On an exponential move, that last bit before a peak is always very lucrative. In the tech boom, the last part of the move provided the best money, but anyone that held for 1 day too long lost 95% of their investment. So calculating risk / reward makes that last part of the move also the most risky. The bitcoin chart looks to be in the last part of a big up move.

After a big up move, there is a pullback. That pullback could take prices to 50% levels of recent highs, or more depending on the level of leverage used by market participants. This will lead to a markets shakeout that will consolidate to value levels. For bitcoin, that value level would be a level area before the latest spike higher ($6000-$9000 range).

There is still demand for crypto currency as a trade and bitcoin as a store of value. That means that more market participants will come into this market, long term. This will eventually drive the prices above the $20,000 level. So if you bought at the peak, it may take 6 months or less to recoup your investment.

After the shakeout, the market WILL move higher. This is because the technology is here to stay. New investors will come in on the dip to give a foundation to price. Price will then move higher, again. Demand across the space will increase, also driving prices higher.

It is difficult to gauge price on new tech in the midst of a hard run higher. The trades for bitcoin actually look more like options trading than shares. In options trading, high volatility is common, with the occasional consolidation and stall. Futures options are cash settled instruments much like crypto.

Crypto-currencies, unlike options, have no underlying to peg their value against. So what provides value?

Speculators - Faith in higher prices. Greedy desire for profits.

Value buyers - Anti-establishment beliefs. Belief in new technology.

People who are speculating in crypto are going to be quick to jump ship when price moves south. Currently, media hype and massive profits have given speculators a reason to hype this market to other potential speculators. As it stalls and reverses, these same people will likely be crying into their hats. Smart money will wait for this shakeout before re-entering this market.

Investors are here for the long haul. They are the ones that will put the floor into crypto-currencies. They are the ones looking for the next amazing technologies. They are the ones with faith in the tech to take their money out of a corrupt banking system. So if you can figure out where the long term investors think is value, then you will know where the price action will bottom and rebound.

If you are investing across the crypto space, be aware of what you are trading:

Bitcoin and Ethereum are primaries. That means that they are used as currencies and stores of value. They have proven technology and fundamental value because of acceptance within market. They can also be used to arbitrage trade currencies (XBTEUR /XBTUSD) on crypto markets as the currency spread can vary up to 5% or more.

Most other crypto-currencies are add-ons to Bitcoin or Ethereum. This means that their code and value derive from some association with the primaries. Expect that the primaries will ALWAYS outperform (long term) these derivatives to the primaries.

Some new release crypto-currencies claim to have revolutionary technology. Most don't. If you barely understand crypto-currencies and computer algorithms, then it is unlikely that many of these revolutionary technologies will make sense. So you can either buy a basket of things that you do not understand, or you can spend a lot of time doing research and hope that either method pays off.

Personally, for value for time, I will just trade the primaries… like they are options.

My options/futures trade advice:

2x 1:3 10% +/-1

Scale in 2x

Scale in and out (by at least 2 separate limit orders). Set orders wide of stable price for best entry and exit.

Use 1 loss: 3 win ratio.

Set your win loss ratio (stick to it). Exit on the down side by 1 measure, or on the up side by 3 measures. This is based on price and volatility of recent market moves and potential for price variation. Do your research.

Only risk 10% of pot.

Set your Stop-Loss at 10% of what you are trading. If you lose that 10% then you will still have 9 trades to make it back. If you are making 10 trades that have a 50% chance or better, then on a 1:3 ratio, in the long term you will make a profit.

Start with 1 contract lot. Win->+1, Loss->-1.

(Futures Contract when day trading) Buy 1 contract / increment. Take a chop / win. Add another contract to the next trade. If it makes a profit, add a contract to the next trade. If you lose, remove a contract. When you hit 0, reevaluate the market. This is mostly a rule of thumb to keep from turning a losing trading day into a massive loss day (week). This rule is to help you trade bigger when profitable, and smaller when trading badly (everyone has a bad day).

Trade 5 hours max (without a break).

Sometimes, 5 hours is all you should be trading because after that the decision-making process can be flawed.

When you are focused on the 1 min chart, while looking at the 1 hour and 1 day prices, you will start to become over-focused. Moves are NOT instantaneous (mostly) without data releases. So by focusing on the price action, you will begin to put orders into market in anticipation of a price move that will be slow to materialize. That move will actually take longer to set-up and unfold then you will likely have the patience to see that it unfolds. This will lead you to exit at a loss; so don't do it.
Sometimes, the best trades are made by stepping back from the screen and checking yourself. If you are emotional (losing / winning), you should definitely take a step back. If you are tired, or weary while waiting for your perceived set-up to unfold, stretching your legs and freshening up will give you the opportunity to look at the trade with fresh eyes and re-evaluate the likelihood of it unfolding as you have imagined. This can give you an opportunity to exit that trade before it goes horribly wrong… or provide a better entry point when the trade would have moved against you.

Am I trading well? Yes->Big, No->Small

If you are not trading well, sometimes you just need to cut size… but usually you should just exit markets and take the loss. Live to trade another day by not blowing up your account.

From my old trader notes on psychology:

http://www.addlepated.com.au/index.php/trader-notes/rough-trader-notes-list/275-rough-trader-note-philosophy-2012-q4

 

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