Crypto markets extremes can be BIG PROFITS. Once we know markets go to extremes, and we know how to measure it, we can put that on our side. Very few traders wait for that advantage, and fewer still are prepared in advance to exploit that advantage.
And that’s what this video is all about.
I’m sure you’ve heard the Cliche ‘cut your losses, hold your winners’, this will keep losses small, but it misses a second factor every pro uses to exploit the advantage of market extremes – for the big profits.
Most of your money from trading is going to come from trades that take off rather quickly from when you put them on. That is the reason today’s video is so important.
As crypto traders, we are after a better return than most would consider fair in any other investment.
Many crypto trading plans have the trader in a position at all times, the thinking being that the market is either going to go up or go down. Perhaps you have been trading crypto this way, and maybe making 60% correct calls and still struggling to consistently grow your portfolio. Often, trying to guess every market move just encourages over trading, second guessing and a string of small losses.
Without the strategy we cover today, you will find that trading still isn’t even a 50/50 game.
You may win more often than you lose and never recover much beyond your losses.
It is natural to want to take a profit to prove that we are right. Being right does not, in itself, make the most amount of profit. It’s important for us to keep a good position as well as impress upon your own thinking about having a correct position initially.
Maybe you’ve put on trades and waited for the market to prove it was a bad position. And when your position are correct, the next step is wondering when to get out. It’s human nature to do it this way. It’s the source of many trading difficulties.
The time to get out of a position is not when the market is proving your position to be a correct one. You have the opportunity to be wrong as often as correct, but when you are already proven correct, this is certainly the time to step off of first base.
- Our first risk control rule for crypto trading keeps us protected from our lack of certainty and the second risk control rule helps to enforce the certainty in those crypto market extremes that do prove correct.
- This is the second part of two special videos on risk control. If you haven’t watched the first one already, be sure to go back and watch the video on Rule Number One.
Without a correct method to keep you in your winning trades and to press your correct positions, you will never recover much beyond your losses.
When your trade is correct you must be bigger at that time. This will require a rule, a strategy, which is designed around adding to winners in an unfavorable game to come out ahead in the long run. And here it is:
Rule #2
Press your winners correctly without exception.
Sounds pretty elementary but correctly is the key. What you hear quoted most of the time is “cut your losses.” Cutting your losses is vital for survival, but you need this pro strategy if you want to make profits.
There certainly will be debate on how you know when to add to a correct position and on how a market can turn a correct position into a wrong position. I’ll get into specifics in a later video when I show you the flow chart for ‘The Five Stages Of The Trade’ – it is so important because Rule Number Two shows up in three of the Five Stages Of The Trade.
I’ll share our most important add-on plan at the end of the video, but first, let’s unpack this – and get a birds eye view of this Pro Tactic.
Press your winners correctly without exception.
Rule #2
Just because you have a position in your favor does not mean you must now add to that position. “Correctly” means you must have a qualified plan of adding to your position once a trend has established itself. The proper criteria for adding positions depends on your time frame of expectations in your trade plan.
“Without exception” the rule indicates it is not an arbitrary decision on the trader’s part whether to add. It is not optional. Keep in mind that a correct way of adding in one trade plan may not be correct in another.
You might be a day-trader just trading back and forth, a short-term swing trader, or a trend trader only. Each trade plan will have a different criteria for adding on.
Most traders also want to get out before the market turns and takes away any profit they may have. We may let losses get larger because we are wanting to be right and hoping the market will reverse… and yet we may only let the gain get started before taking those profits… taken together, this will cause your losses to be larger than they need to be, and your profits smaller than they could have been.
Be sure to watch our video on ‘the 2 mistakes that all traders make’.
Rule 2, it states only that you must add to correct (proven) positions and that it must be done correctly. The rule makes no exception on adding to correct positions. The intent of Rule 2 is twofold: Reinforce your correct position both mentally in your thinking and your execution and to increase the size of your position.
The rule does not tell you how to add, as this is your requirement in the trade plan you develop.
Trend traders will start small and get larger when they are correct, but day-traders will start larger and get smaller when they are wrong.
Trading Crypto In The Long Term
These two rules are to give you the long-term ability to continue to trade with the least amount of drawdown and the best possibility of making the most money in the long run.
Huge drawdown is the critical reason some traders go out of the business. You must start your trade plan with rules created to protect your equity. I am presenting those rules to incorporate into your plan. Experience has proven these rules a necessity in survival and reaching your objective of making the most return with the least amount of risk.
It’s easy to focus on the predictions, on the potential profits, and unknowingly put the risk control rules on the back burner.
In the last video we focused on Rule Number One, the strategies that will keep you in trading for the long-term. This keeps risk small at the start of the trade – but there are times when we want to increase our exposure to a market when our position has been proven correct.
We must address Rule 2 when creating the trading plan – before the trade is placed.
It is a solid rule and its importance cannot be diminished in trading. Until you see the reward from Rule 2, it is very difficult to understand.
Many traders will leave a plan to add to winners on the back burner when it is time to add unless you fully understand the need for this rule.
I believe most traders want to have a certain size position, and that is the position they place from the start. This is not a correct way to allow you to use Rule 1 and definitely Rule 2 properly. When you see an expected move from the start of trading, your thinking is counter to ever adding in the first place.
True, you should be at least twice as big or larger when right than when wrong, but you must work that position into your trading plan. You never risk it all on the initial position being correct or you are defeating the rule.
I want the traders to ask themselves two questions:
“Do you put only part of your expected position on from the initial entry?
“Are you planning for adds prior to your initial trade?”
If the answer to either of these questions is no, then you must go back and rethink your trading program. I have said it before. If you can think it, you can do it. Perhaps the traders aren’t thinking it to begin with because it certainly is not expected thinking without the proper planning.
This is your enemy . . . to love to be right. Your motivation must be to love to do the right thing in trading by either reinforcing correctly your position or removing it should it not prove to be correct.
By incorporating Rule 2 in your game plan from the start, you will be eliminating the desire to be proud when the market moves your way and want to take profits to show that you are right. Traders love to be right.
You will become the best trader you can be by being wrong small, not right small! Get that in your mind now. You are going to have to press your winners if you really consider yourself to have the ability to make a living or extra income from trading.
Otherwise, face the truth that you are only playing to break even.
You must understand that you are not the one who will determine your market position size. It is going to be the crypto market and must always be the market. Rule 2 is going to tell you to put a complete plan into effect before taking the initial position.
I cannot help you with over-trading or being under-margined. You must correct that situation before you can ever expect to be on even ground with the big funds. You must at all times be able to put only a portion of your expected position on at entry and be able to at least double your size somewhere along the route of an expected move.
The protection is Rule 1, but the biggest protection is Rule 2!
Now I am going to tell you why Rule 2 is the biggest protection of all. You never suspected what I am going to point out.
You have all heard that you should not add to a loser! Well, Rule 2 takes care of that from the start by keeping you with a smaller entry position in the first place. You never have your entire position until you are getting the move you had expected.
Now, why would I encourage you to have half of your total position at entry?
Because it is a losers’ game from the start and you knew that from Rule 1. Now, from Rule 2, you find out that, to trade it correctly, you were never really suppose to have your initial position upon your entry of a trade.
Traders are over-trading most of the time when they say they can’t seem to justify adding to an existing position. Most of the time a trader does not think about the reason for adding because they have their initial position on from the start. This is their maximum risk from the start.
That is never what you want in trading. You must take some risk but never your maximum. That is exactly what they are doing if they cannot plan for added positions along the way.
Strategy For Adding On To Successful Trades
Correctly adding to a proven position must be organized so that a top-heavy trade isn’t established because that will ruin a good trade in a minor reversal. Each add onto an original position should be done in smaller and smaller steps.
As an example, if you had a $6000 trading account, and you planned to put 10%, or $600, into a specific trade. Put $300 on as your initial position, add on another $200 if your criteria are met, and be prepared with an additional $100 to add if the position continues the trend. This gives you twice the original position size when all three positions are in place. I practice using a 3:2:1 ratio in establishing a full position.
All credits for this work go to Phantom of The Pits and thanks to Art Simpson for permitting me to share this work.
