Diary of a Struggling Trader #4: Choppiness and how to avoid it
Market outlook, trading the recent chop and losing streaks
(Not financial advice)
Hi fellow anons and welcome to another post of Diary of a Struggling Trader. Again, thank you to everyone that spends even the smallest amount of time reading this. I really appreciate that.
In today's article I am going to go over market's situation, trading the choppiness, and losing streaks, with a final note about my current state. I will try to make it shorter and easy to read, to give you guys a bit of time to digest my last piece.
If you find anything useful in this article or enjoy any other pieces that I put out, please feel free to share it and subscribe, it really means a lot to me.
Introduction & market situation
"Certainty about the uncertain". That would be the statement that I would use to describe the last couple of weeks in the market. After a considerable drop from all-time highs, equity markets experienced a needed bounce to awake again the FOMO (Fear Of Missing Out) of inexperienced investors. However, this bounce did not work as smoothly as expected. The market has been trading in a choppy range in which both bulls and bears find it complex to make money, as edges are minimal, and uncertainty is incredibly high. Inflation concerns spreading even more, jointly with the ongoing situation in Ukraine and the threats of a potential war, have created an environment in which the market is still trying to decide a direction. But it looks like once it does, a good move could come with it.
Clear double top at the 456 level, for what it looks like a downtrend continuation
Regarding the crypto space, BTC had been trading as a SPY simulator pretty accurately until it suddenly decided to break the downtrend trendline that it had been respecting since November 21'. This breakout triggered several market participants. Firstly, late shorters looking for the easy play that did not realize how advanced the downtrend already was. Most coins were down 50%+ since the last quarter of last year without showing any signs of life and a bounce was pretty much due. Although I know this does not happen on a real bear market, from my perspective, even projects with great fundamentals had been hammered and it was time for them to catch a bid. Secondly, algorithms and breakout traders, buying as soon as price crossed the trendline and confirmed the continuation. My knowledge about quantitative trading is not extensive (currently learning Python to get into that field), but I am aware that a variety of systems are programmed to execute orders as soon as the price crosses a specific key level. Thirdly, FOMO chasers waiting on the sidelines on cash, trying to get in at the beginning of a new uptrend. Finally, we should also consider the increasing buying pressure of institutions, as the scarcity trade starts to play out and big chads keep accumulating more BTC.
Downtrend breakout with strong resistance at 46k
The way I see it, unless interest rate hikes are outstandingly high or the US ends up getting involved in the Ukraine concept, we could have another good run for the rest of the year. It is fair to say that a serious stagflation period could come towards the second or third quarter, and this would be highly detrimental for the markets, especially for the risk on assets.
However, from the trader perspective this should be completely irrelevant to me, as I should focus on just trading the setups and levels. Hard to keep the emotions out of my judgement as I love the space and want it to strive.
Trading when you should not trade: Choppiness
Choppiness is used to define a market condition in which there is volatility and large, frequent price swings in both directions without a clear trend being established.
Choppy markets should not be traded. Especially if you do not have years of experience in the field. It is too easy to lose money and very difficult to keep gains. That is what most professional traders say.
What do beginner traders do?
Look for the next play as if nothing happens and lose the gains of the recent months. I guess the hard way is the only way of learning this business as there is no in between. You either take money from the market or it takes it from you.
As a new entrant, and with that I am referring to players that got into the game during the last two years, it might appear that the markets are an easy environment to make money. Monetary policy has been a joke recently, with unsustainable liquidity pumps into an economy that did not need it anymore. This capital flew into different investment vehicles, increasing considerably the price of real estate for example. However, one of the most visible consequences of this can be seen in the equity and crypto markets. Companies and tokens have been risen to completely absurd valuations that do not correspond to the value that they provide. And this is extremely dangerous. Making money on the upside when everything is going up is easy. You just had to buy and wait. Nevertheless, when the fog disappears and the capital stops flowing into the markets, the downside can be brutal, and new entrants are clearly not prepared for this. That has been the situation during the last couple of months, assets getting completely hammered and lacking any signs of life, as they are simply unattractive to investors. They are aware of the liquidity drain and prefer to avoid big drawbacks that may be caused by the rate hikes.
In my opinion, this is one of the main reasons why we are currently trading in this range, without a specific trend being formed. Perfect definition of choppy. Prices bouncing from one side to the other, offering great trades for experienced traders that know how to play key levels. Also, certain good levels for institutions to accumulate more of their desired asset. Difficult time for recent entrants lacking knowledge, macro understanding and easy-money seekers.
In the crypto space, lately there has not been an interesting durable narrative that offered great possibility to position. Metaverse tokens (AXS, SAND, ALICE, MANA, WILD, GALA) have had a pump. Extremely hammered sector, BTC breaking downtrend, supply exhaustion, short squeeze and lower liquidity during certain trading days, have been important factors for this to occur. AVAX has been on a good run too, but that would be pretty much it. Eco plays have been dead, and I have been trading much more off chain that on chain. This is just because of the perception that charts provide me a better possibility of building a strong system than trading shitcoins does.
Hsaka explanation of GALA run
Personally, I have found myself trading the chop, even though I was able to identify it. My desire to learn more and to be constantly in the market has led me to take trades that I clearly know I should not have taken. Setups that I have not studied enough. No valuable edge to give me an EV+ play. Lack of trend, not paying attention to my rules, trading based on intuition in an unpredictable environment. Huge level of frustration.
The markets are an arena in which complete beginners get to fight with players with immense experience, and everyone knows how this ends.
The positive point is that I have learned a very valuable lesson. The importance of having an edge and respecting your rules. Knowing when and when not to trade. Money is not made every day in the markets.
I have made many mistakes, but I have been able to reflect on them, making sure I will not repeat them in the future when I have more capital. Still sure I will get there.
Losing streaks & how to deal with them
The second topic I would like to touch on is losing streaks, because as you might imagine I have been through some. Sometimes you just follow your system and do what you are supposed to, but still may lose. That is the way it goes. And it is hard to see how you take consecutive losing trades, no matter what. However, if you know what your mistake was and you repeat it, then it is even worse.
Losing streaks are a nightmare through which most of traders go through in their career, totally normal phenomenons that could happen even to the best in the game, as it is just a probability issue. However, you should not confuse a losing streak from a trader that has executed everything as it should have, with the complete inability to trade from a beginner leading to consecutive losses.
The first point to solve them would be to analyze in what part of the spectrum are you.
What is your skill level and your market understanding?
Are you missing some key information or probability has been just playing against you?
Are your trades EV+ or EV- from the very first moment?
Those are some of the things that you should ask yourself. To be honest, if you have been through a losing streak, you are still in the early stages, as usually more experienced traders know themselves and the market conditions in which they shine, knowing also when they need to cool off.
Secondly, I would highly recommend going through your last trades, reviewing them step by step. This is why journaling is so important. What I usually do is pay attention to every single aspect of the play:
Reevaluate the thesis behind it: Was it that I followed the wrong narrative? Did any other asset in the space had more volume? Was it just an incoherent run?
Analyze the market situation: Was the trade in line with the current situation of BTC? This means, if BTC was setting up bullish, was my trade in the same direction or I missed the trend completely? From my experience, I have learned that fighting the trend is very dangerous and you should not do it unless you have very clear reasons behind it.
Re calculate the risk/reward ratio: Did you take more risk than you should have, for a trade with that estimated probability? Was the ratio not beneficial enough? As a beginner, you should aim for high ratios, from 1:3 to 1:5 would make sense. This is because this will allow you to have a lower win rate but a higher average win per trade, putting you in a good position to not blow up your account.
Pay attention to the execution: Was my timing correct, or was I late, or early? Did I rush to take it or was I patient? Did emotions affect my execution? How could I improve it?
Observe sizing: Was the sizing appropriate, in order not to risk a high percentage of my account? Did I oversize, making emotions affect me? Did I follow my rules?
Ranges/ trouble areas: Did I re evaluate the trade appropriately any time it encountered a trouble area? Did I manage risk correctly? Did I move my stoplosses? Why? Why not?
Those are mostly the factors that I like to focus on when studying past trades. After that, for the next trade I try to review my notes and write everything down to avoid repeating mistakes.
Another thing that helps me when trying to overcome a losing streak is reducing the size of my position to just a fraction of what I normally do. This enables me to avoid emotions and focus just on the process, enabling me to re-connect with the market and improve considerably. Just putting it out in case it can help somebody.
Final note & current state
Regarding my personal situation, from my perspective I have been noticing some more improvement, but I have been trading way below my knowledge level. With this I mean that I have been missing trades that I knew exactly how to execute, or I took trades that I knew exactly why I should not have taken. I have been oversizing in setups that I still do not master completely and that require much more studying. I have been too eager to make more money, and impatience leads to errors in my case.
I feel like there are certain mistakes that I need to make several times in order to actually interiorize them and repeat to myself that I will not do it again, but hopefully I achieve it in the near term.
In my opinion, I am currently paying market tuition, which is the price that you need to pay no matter what for experience and leaning in the market, just as if you took a university degree. At least, this is what I say to myself in order to keep going. If it was easy, anybody could do it.
After this, I should also mention that my knowledge has been increasing noticeably in recent months. I make a lot less mistakes than what I just to do and overall, I feel like I am progressing a lot towards my goal. I honestly think I will get there, just need to keep working.
I hope you learned at least a tiny bit of something during this article and I wish you can incorporate some of it into your process to keep growing. Just trying to help.
Again, thank you so much just for taking the time to read. See you on the next one!
ETH wallet if anybody is trying to help a hungry student: 0xa9e329b3FF760E3f3011dE599E47A8B0F2099CD4