I hunched forward, shoulders tight, staring intensely at the screen, the prices surging across the chart.
“Get out!” screamed the little voice in my head.
I ignored it like I usually do.
That stupid voice is Chicken Little. The sky is always falling. It’s there to save you from bad things happening but the problem is it always thinks bad things are happening. Your brain sees disaster around every corner. It’s wired that way.
And it’s usually wrong.
But today was different.
There was something wrong. I knew it. I just couldn’t see it clearly yet because my head was spinning crazily, my heart thundering in my chest.
A storm of confusing advice battered my skull.
“Don’t listen. You’re fiiiiiine. It’s all good. HODL.”
“Remember that time you sold right before the big run, loser? Hahahaha! That’s what’s happening. Perma-bulls are right. It goes up forever!”
“It’s a mirage. You can’t predict the future. Forget it. Just hang on. You’re gonna miss out BIG TIME.”
But I ignored all that too. I focused, lasering in the chart, breathing deep from the belly, letting go of fear and euphoria, those twin imposters of the heart.
A minute passed and then another in total silence, the voices going quiet, dropping back into the white noise. My emotions receded with the waves and I was calm and seeing clearly now.
“What is the chart telling me? Go through the indicators. See it clearly, without emotion. Don’t guess. Zoom out. Look at the longer time line. What do you see?”
I turned to the one day chart of Bitcoin.
And there it was.
Time to get out.
I quietly warned my people in Discord and then started to walk towards the fire exit, forcing myself to go slow so I didn’t panic anyone else.
What did I see?
Let’s turn back the clock and go frame by frame. I’ll show you exactly what I saw and why I got the hell out and lived to fight another day.
Oh yeah and I made money while everyone was down.
How did I do it? Do I have God like clairvoyant powers? No.
Well mostly no. :)
But I do have a set of rules. And those rules saved my ass.
It’s Four PM, Do You Know Where Your Stop Loss Is?
I won’t lie. It was an ugly week for me before my big short. I was hemorrhaging money.
After three or four weeks of alts running wild and delivering win after win for me, suddenly I was losing again.
Coins broke up and pulled back in a wild whipsaw. I got in too late and left too early. I was depressed, getting down on myself, fighting the urge to check the charts constantly, not paying attention to my wife when she was talking.
I had exited earlier in the week, after my signals told me something was wrong. But then a few days passed and I was missing the action. I wanted back in.
That was mistake number one. If you have a system, stick to it. Whenever you’re feeling the need to get in on the action again, it’s usually the wrong choice.
Remember: Cash is a position.
It’s the position that says you can’t see any clear pattern or direction for the market. Alts were booming but now they’d gotten choppy. They were losing steam, their engines of wealth stalling at the top of their bull run.
When that happens it’s better to wait on the sidelines until the market makes up its mind about what it wants to do.
I got back into the market for no reason other than I wanted the juice. Terrible, terrible idea.
My system said get out and I ignored it.
What’s my system? It’s a set of rules based on the old school trend following greats the Turtles and on Richard Donchian’s powerful rules, which were first written in 1934, which just goes to show that markets never change because human psychology never changes. More on that later.
So there I was, back in the market and getting chopped to death. A few days went by and none of my trades were working out. I was giving back money I’d made on strong, sound trades, taking tiny little cuts and bleeding out slow.
I started asking questions.
What’s happening? Why am I trading? Why am I even in this market? Was there any real reason to get back in when I did?
The clear answer was no.
I started to reduce my positions. But even that wasn’t enough. I couldn’t completely let go.
I still had about 50% of my stack in the market. For some reason, I wasn’t listening to my higher self. Another day passed. What was going on? I couldn’t figure it out.
What am I doing? I don’t do this anymore. I know how to trade. I don’t make stupid decisions like this and yet here I am screwing it up like an idiot. What’s going on?
Sometimes it goes like that. No matter how much you know, you’re always battling yourself and sometimes you lose.
Fast forward to the day of the market crash.
If At First You Don’t Listen, Smack Yourself Awake
I went back to questioning my motives as I stared daggers into the screen.
If you’re making stupid trades or going against what you know is right, you can’t let yourself off the hook. You have to keep on it, keep asking questions.
This time I got tougher on myself after another night of losing trades.
Why the fuck are you in this market?
Are any of these trades good? I see a lot of red. Your rules said get out and here you are still playing around? Why?
At 3:30 I focused in on Bitcoin. That was one ugly chart. It looked EXACTLY like the famous market cycle chart that shows a big run and a big crash. You know the one I’m talking about because I’ve posted it before, but let’s show it one more time just in case you missed it.
Still, that wasn’t it because I’d been seeing that pattern for most of the last month. It wasn’t new. Yet something was different about it now. What?
I zoomed out to the one day chart and it told a terrifying tale. Let’s take a look.
Here is the chart I posted to my followers on the CoinSheet Discord and the Bitcoin Masons Discord.
That was me, zoomed in to look much closer at the candles on the one day Bitcoin chart.
Here’s what I noticed:
That red line just under the candles is the exponential moving average 50, or EMA 50. It averages the price over 50 bars giving extra weight to more recent prices. I won’t bore you with the math but you can Google it. In this chart that means it’s the average of 50 days.
Notice how the price ripped through the EMA 50 multiple times recently?
We can see that for several weeks Bitcoin flirted with that line again and again and again before bouncing up to lower highs. You can see long wicks at the bottom of the candles going through the line, which means the price fell through it and then bounced. You can also see the entire candle slicing through the line multiple times.
That wasn’t good at all.
I zoomed out again and counted how many times Bitcoin had crashed through that line during its big bull run. Turns out it had only done it twice, for one day only each time, in Sept and Nov. That’s it. Two days.
And here it was smashing through that line again and again over the last few weeks.
But to be fair, it wasn’t exactly crystal clear which way it would go at that point. I was getting mixed signals.
The pink and purple linear regression channel was still pointing up. Linear regression finds the best line through a chaotic pattern of points such as stock prices. With Bitcoin on its big historical run, the channel still pointed to the sky.
The last candle the day before also closed on a near perfect doji, which is often the signal of a reversal. With the price action at the bottom of the linear regression channel and the doji it could just as easily have signaled an up trend returning.
And that was the real problem.
The chart was mixed signal city.
That meant uncertainty and that took me back to one of the key Donchian rules.
“Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing.”
When you can’t tell what the market is going to do next that’s not the time to hang around and hope for the return of the mega-bull. It’s the time to seriously reduce positions in the market.
Here’s what I posted in Discord for all of my followers. It was around 4:30 on Jan 15 2018.
The phrase “crawling along” comes from another key Donchian rule:
“Watch for crawling along or repeated bumping of minor or major trend lines and prepare to see such trend lines broken.”
That’s exactly what Bitcoin was doing right then and there, slithering along. It was also coming very, very close to a green line I’d drawn through the middle of the bull run many months before. You can see it below the EMA on the chart. If it broke that long term trend I knew were were in serious trouble because it hadn’t even come close to it in almost three months.
I quickly started selling off all my alt positions knowing that a big Bitcoin dive would drag all of them down with it. With too many open I knew I had no chance to react fast enough to close them in a major sell off. I consolidated to Bitcoin and sat there waiting to see what the king of coins would do next. It didn’t take long to become abundantly clear.
At just after 5 PM PST the first signs of the apocalypse hit my LCD.
The prices shot down fast through the EMA and the green line of doom.
Time to get the hell out.
When the markets make a major move like that there is no time to wait. You have to sell first and ask questions later.
I posted a quick note in Discord to warn people and I started to make a run for the exits. I did not post on Twitter because I did not want to risk sparking a bigger panic especially if I was wrong.
Here’s what I wrote.
As noted, that top chart shows the one day candle starting to break down below the linear regression channel, the EMA 50 and the green line of doom. It also shows the one hour chart where the movement was more pronounced. I don’t look at the one hour charts often, unless I want to see just how fast the price action is moving and it was moving like boulder dropped off a skyscraper!
I sold everything to fiat and waited.
Five hours later the market turned into a blood bath.
At that point the trend became painfully obvious. Down. Fast.
I hopped back into the market and shorted every coin I could as they all racked up significant losses.
While the whole world was bleeding I made money.
I want to be very, very clear here.
Bitcoin’s price could have gone either way.
In that way, the title of this article is a little misleading. I wasn’t actually sure that Bitcoin would crash.
All I knew was that the market was at a big turning point. And that meant get out.
If the market is close to a potential mega-drop it usually happens fast. Once you get caught in the landslide you’re stuck. It’s almost impossible to sell without terrible losses. I had people messaging me the next day that they dropped from hundreds of thousands to $40,000 or less. Multiple people. Some lost even more. That’s how fast it moves. And it’s a devastating blow. Some traders never get over it.
On the other hand let’s say the bulls take control and the price rallies. OK, no problem. You miss some of the run. So what? Let the rally start to really take hold. Watch it. Let it go beyond a few hours and stretch into a few days. Make sure it’s real. Miss 10% or 20% and then hop on for the ride. You protected all your money and now you can join the party late.
In trading and in life, show up late and leave a little early.
That’s called eating the body and leaving the head and the tail.
You hop into a run a little after everyone else, letting others do the guessing and you get out after it starts to die, missing the big drop. You show up late to the party, drink all the booze, eat all the food and leave the mess for someone else to clean up. (OK, don’t do that in life, only in trading).
In other words, you catch 70–80% of the run and live to fight another day.
It goes back to the number one rule of trading.
Don’t lose money.
That’s the essence of my philosophy of trading and it works. It’s the philosophy of the greatest traders in history, people who’ve beaten the market for thirty of forty years.
It’s called trend following.
Trend following is different from other systems. Lots of people try to predict which way the price will go. If it hits this or that support line it will bounce. I ignore those predictions now because they’re wrong just as often as they’re right.
Instead, I wait for the trend to develop and then I go with it. Like a praying mantis I wait for the market to come to me and then I pounce.
This is counter-intuitive. It goes against basic instinct and everything you’ve been told your whole life about trading.
Trend following cashes in on outliers, big deviations from the norm.
Most of the time the market moves close to its averages, but then a black swan event hits and long term buy and holders get absolutely destroyed. Trend following makes all of its wins in huge moves. It returns only average results while the markets bounce around but as soon as a big bull run surges ahead or a major sell off hammers everything, trend followers leap in and make mega returns.
Home runs make up for all the little back and forth moves when the market isn’t trending.
Now a few folks seem confused that I would sell when I also have articles recommending a buy and hold approach. Let me clear that up for you. I have two stacks. One is for buying and holding and the other is for trading. The split between the two has been as high as 50/50 but these days it’s more like 70/30 or 80/20 in favor of trading because I like trading when the market is trending. Trend following holds the possibility of a higher rate of return than buy and hold if you do it right.
My buy and hold is also not the same as most people’s buy and hold.
The popular version of buy and hold is a fantasy sold to people by Wall Street to steal their money. It’s based on a crazy idea called efficient market theory that says everyone has perfect information about the market and all assets are priced fairly.
It doesn’t work. Eventually and inevitably a black swan event comes calling and wipes out all of those huge gains from buying and holding as if they never existed. You can buy and hold for ten years and have it all wiped out over night. Wall Street made their money on your fees and you get a turd sandwich at the end of your patience persistence. Not awesome.
The buy and hold strategy I lay out in Mastering Shitcoins: The Poor Man’s Guide to Getting Crypto Rich is a micro-VC strategy. While most folks never really recover from a massive drawdown in their portfolio with buy and hold, the micro-VC strategy invests in coins the same way venture capitalists invest in companies. They assume that 80% or more with go to zero. Ziltch. Nada. Nothing.
The other 10% will do pretty good.
But it’s the last 10% that make all the difference. Those are the home runs.
The home runs make up for all the other ones tanking. It’s buy and hold based on probability not hope.
And of course, what happens when that coin goes to the moon?
You sell. Sell as fast as you can.
You don’t hold onto it forever. You take the money and run.
You see, even buy and hold needs an exit strategy.
When you’re trading you need one and when you’re holding you need one. If your gains are unrealized, guess what? They’re unrealized. That means they’re not yours until you sell! If you’re still counting your stack at Bitcoin’s $20,000 high water mark I urge you to reconsider. It’s 50% down from that lofty high, which means your stack is too and there is no guarantee it ever gets back there again.
Oh, don’t get me wrong. I think it will and I hope it will but hope is not a trading strategy. Assume the worst. You have to learn to sell near the top. It’s one of the hardest lessons to learn in trading and in life.
And after you sell?
The primary goal of investing is to protect those hard fought gains.
That’s because the magic of investing is compounding gains.
Let’s take a look at a trading stack that is worth $200,000 versus one that is worth $45,000. Imagine that you’re able to get a 20% rate of return over seven years.
If you managed to run your stack up to $200,000 during the Bitcoin run and you somehow keep it during major bloodbaths, here’s what that stack will look like in seven years:
Now let’s say you HODL at all costs during a major crypto massacre and you watch your stack vaporize from $200,000 to $40,000 in a few days. What’s your rate of return if we take the same 7 years and 20%, provided that you learn your lesson in the first place and start trading smart after that?
That’s a big difference.
You have to work hard to protect your assets when you’re trading. It’s as simple as that. That’s why the ultimate sage wisdom of Richard Donchian is this one that you should print out and tape to your wall right right now.
“Trading is trading, and the name of the game is increasing your wealth. A trader’s job description is stunningly simple: Don’t lose money.”
Or maybe it was Buffet who said it best:
“Rule №1: Never lose money.
Rule №2: Never forget rule №1.”
DISCLAIMER: Be a big boy or girl and make your own decisions about where to put your hard earned money. I am not a financial adviser and this is not financial advice and if I really need to tell you this then it’s best to keep your money under a mattress anyway because when you lose it you’ll only blame other people for your mistakes rather than yourself.
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