On 'Being Underwater'

Flipping the Script

Dear Readers,

My what a week it was in the market. More of a spill than a thrill, and perhaps now a confirmation of the market-wide correction I’ve been expecting. All good of course for the market going forward as over-extended moves to the upside need their corrections. When zooming out, this is certainly a market you want to have exposure to, and yet, as is inevitably the case, most of us end up buying first on the spike… and on the spill, on the market correction, we find ourselves ‘underwater’. I thought it timely for this fortnight’s article to look again at this expression. My contention here will be that it is not the worst thing to be underwater, to a certain extent, and is rather to be expected, especially on your first buys, in this radically volatile market of Crypto.

And so while drinking my morning coffee aboard the boat and over-looking the calm water, it strikes me what an odd expression ‘being underwater’ is. As land dwellers, we naturally gravitate toward stability, but as a pseudonymous wave I’d suggest the fluid is just as helpful a concept as the solid, perhaps even more so when we consider our topic of interest for the moment is the liquidity of money. And then doubly so as we move into the world of Crypto, where price is so volatile as to ebb and flow, to move like waves, and to move in even greater patterns that seem positively tidal, cyclical, seasonal. It all makes the conventional view of markets as a continual march in one direction, - as a series of digits or units super-added one to the other in a linear sense - as inadequate and simplistic. No, the crypto market is fluid and moves in waves. And this really should come as no surprise to us market participants when you consider that price action, often dull and sometimes dramatic [like the sea], is the sum reflection of our collected emotions, desires and passions. Ok, there may be an element of reason in the mix, but it very much plays the minor to the major here [who believes in efficient/ rational markets these days?]. The reality is that human nature is passionate and nowhere more so than in the Crypto market, where reason itself typically becomes subservient to our passions in this space. Of course the problem with the passions are their extremities - they will swing one way and then the next, and hence the radical volatility you see. Yet even in an exponentially moving market, a rebalancing and reversion to the mean can be made out, in much the same way as the sea soon settles after periodic storms. I’ve referred to these relatively regular periods of volatility in the market as ‘speculative episodes’ in a previous article titled ‘The Cycle Revisited’. This article will look to take this notion of the radical volatility of speculative episodes further. The idea being that if the baseline that we’re to work with is a more fluid and unstable one, then being ‘underwater’ at times should simply be thought of as coming with the territory, and hence not something to be avoided at all costs, or something to be fearful of. Rather, being underwater for a period of time should be considered the norm. This new normal may require some adaptation on the part of more conventional investors, where they may be used to more conventional markets. A set of ‘sea-legs’ may be in order insofar as they enter the far more volatile waters of the Crypto market. Without them, and without the right instruments, they’ll soon be feeling seasick.

The base-line or norm in Crypto is the volatile flux, and accordingly, if you’re to avoid vertigo, your eye needs to be kept on the horizon, which in TA terms is the greater trend. The approach should be one that is ‘solidly’ empirical, that is, one based on the flux of experience. It is market price as it is actually developing that we are interested in, not how we think it ‘ought’ to develop by some a priori program of reasoning. And what we see is market price rising and falling as recorded by the chart. Price expectations are adjusted to the trends, as perceived in the chart, rather than having a static set of rules projected onto that chart. This is because projections can go wrong in two ways - first, the investor projects an unrealistic price expectation, and secondly, the trader projects an inflexible rule about the use of conventional stop-losses. Given these projections, the investor will often buy at the top, and the trader will sell too soon. But our focus here for this article is on trading. The use of conventional stop losses will see a trade sunk for a loss on what may just be perfectly normal volatility as compared to previous volatility. It should all be relative. Where one trader, without an eye on the ebb and flow, will be stopped out, another will ‘realistically’ ride out the volatility to more likely see their trade get established [it’s the established trades, that ride the greater trend and tide up, that make the most and the easiest money]. ‘Realistically’, because the trader that’s re-calibrated for Crypto volatility has a realistic view of the Crypto market - they know that the times most fraught with difficulty will be the ones where they’re both entering and exiting the market, and hence will be prepared to weather a higher degree of volatility. Of course, none of this precludes the use of stop losses. It’s more about the use of realistic stop losses.

And so here we are, the tide has turned, and our lately entered trades and investments are underwater. And this is where one’s strategy comes to the fore [see ‘The Fool-Proof System of Trading’ if you don’t have one]. You’ll ask what kind of trades these are - are some or most for the longer term? No doubt you’ll also consider how exposed you are - under-weight or over-weight? And how hedged you are, if the market goes into a nose-dive will it bankrupt you? Most that have a strategy of sorts will be thinking about lightening up their shorter term trades, and then keeping exposure to some trades for the longer term even if in the process of going underwater. Why would this make sense? Why not just have a fire-sale of all your positions? Because this is Crypto, and Crypto corrects, and then bounces back to the upside unpredictably. IF [a big hedging ‘if’ that safeguards against being over-exposed/ going ‘all in’] you think Crypto is in a multi-decade ‘secular’ bull market, you’ll be looking to keep some trades/ investments on the table. That they may go underwater for a bit comes with the territory. But Dave, you say, how can I sit on positions when the market could retreat 50% or more? To which I’d say it really depends where and how heavy you bought. If you piled in at the top, then sure lighten up. But if you’d bought at a lower level, and are keen to realize profits before the tide rolls out on them, then think again. For the easiest money is made in the ‘sitting’ [which involves selling at a later date]. Even those with solid gains in many coins in having bought a lower level clear above the current volatility were at some point tested with market volatility, and the uncomfortable experience of ‘being underwater’. There are no easy buys. The establishment of a longer term trade, at whichever level you buy, takes some time. Remember, if the greater trend is up, you want to cover the risk to the upside [being out of the market] as much as covering the risk to the downside.

So in sum I’m saying keep some exposure even if you need to lighten up. If you’ve a strategy in mind, you’ll not be too anxious one way or the other. Consider anxiety that canary in the coalmine that signals danger [as much by its chirping as by its silence]. And strive for that trading/ investment state of mind that can be as tranquil as the sea, devoid of emotion.

Until next time,

Stay [relatively] safe out there,

Dave the Wave.