The Weight of Trades

Too Much, too Little, too Less....

Dear Readers,

Given the previous article, where I looked at the ‘lazier’ trader who trades less often, I thought it only makes sense to further examine the weight of those trades in this fortnight’s article. If the frequency of the trades are less, it’s only logical that those trades will be larger. I think many of us may have experienced the success of trades only to realize they’d not put enough money to work. They’d played it too safe, and not really capitalized from the venture. Of course, the key here is to find that ‘goldilocks zone’, where the trade is not too light, nor too heavy, but just right, or appropriate or proportional, according to one’s own risk tolerances and wider positions. And with risk tolerance in mind, what is an appropriate trade is going to be relative no doubt to the track record of your trading, and the amount of capital [or savings] you have at your disposal. The appropriate trade is therefore relative to the trader’s own context. In what follows, this article will look at 1] the weight of individual swing trades, and further 2] the weight of those trades in the aggregate - as relative to the balance of one’s swing trading account in general, and then again the total balance of the swing trading account as relative to one’s wider Crypto positions [yes, these are separate]. Once again, think of this approach as a perspective, or as a style - there is no one approach to rule them all.

1] The Weight of Individual Trades

As I touched on in the previous article, there is a relativity involved with your career in trading especially as that career becomes more successful -

https://davethewave.substack.com/p/the-lazy-trader

As this applies to us as traders, the beginning of this process is arguably seen in the relativity of money in quantitative terms - $100 dollars to one person is going to be the same as $1000 to another [as their means increase], and again $10,000 to another, and yet again $100,000 to another [and need this be taken to the nth degree?]. This is seen in the world of trading, one starts small and with success comes the larger trades.

Though the examples of these comparative amounts differ each time by a magnitude of 10x, and primarily refer to the relativity of money [the ‘weight’ of it], the same principle can be applied to the burgeoning trader. Once you’ve made some successful trades with what is a reasonable amount of your trading account [say 2%], then the size of those trades will naturally increase commensurate with the balance of your trading account - further capital to be put to work comes from your trading success. What’s of interest here is that though the nominal amount of money put to work with each trade may double or triple, in relative and real terms - in terms of relative ‘weight’ - the proportional value of this trade as related to your trading account remains the same. If you’re on a winning streak [or rather fortunate enough to be in a bull market], you want to maintain exposure [and composure] and the appropriate level of risk that you’ve so far found rewarding, as opposed to changing tack and playing it overly safe… or the opposite. Once again, it’s a matter of finding a balance between timidity and recklessness, for fortune favors the brave. If, as I’ve argued, there is a relativity to your perception of money - though you may acquire more of it, your trades will stay the same in proportional terms - your 2% or 5% trade [of your trading account]. In this regard, there is no increase of risk here though the trades are getting larger in nominal amounts… and depending on previous success of course.

If instead one was not enjoying success, then the opposite process could occur [instead of ‘doubling up’ as is the temptation of the gambler on a losing streak as opposed to the discipline of the trader]]. As the size of your account increasingly diminishes with failed trades, so too would your trades. This would be a capital preservation measure. Effectively, you are still at the apprentice stage, or on probation, until those successes start to roll in, however small. And once they do, and your trading account grows, then a level up in the size of your trade would be warranted. All of this may involve the breaking of a habit [itself a derivative of money illusion in my opinion] where you’ve always put on a certain nominal amount in a trade. However, both an increasingly quiet confidence in your abilities, and an awareness of decreasing returns in relative real terms [as opposed to getting too greedy] should see you naturally graduate to ‘weightier’ trades. As our picture of the weight-lifter suggests, there is a process involved in shifting to weightier trades - one may first need to acquire the requisite attributes before piling further weight onto the bar.

2] The Weight of Active Trades in the Aggregate

I’ve so far discussed the size of particular trades, but there is the further question of how many of these trades in the aggregate are being made in general terms. This no doubt would involve a consideration of what phase of the ‘speculative/ trading cycle’ [not thinking multi-year ‘cycles’ that are more relevant to investors here] you think the market is in, i.e.; whether you think prices are in a movement up, or in a correction, or in a transitional phase. Much would enter into these considerations, which are perhaps outside the scope of this particular article on the weight of your trades. Suffice to say here that in the aggregate, the trading account can be exposed in total terms [of all trades on the table] from anywhere between a quarter [risk off phase] to three quarters [risk on phase]. Those that do the math here would soon calculate that I can be long quite a few coins at times in my trading account [at the bottom of the perceived ‘cycle’] with say 75% of my trading account in 30 odd coins/ trades each weighted at 2 to 3% of the account [75/ 2 = 37]. The reader might be thinking whatever happened to the lazy trader with so many trades on the table. But keep in mind, that these trades are relatively long term [where odds are improved], efficiently managed, and are mostly just sat on for months once bought. Such a variety in coins is also observant of a basic hedging principle that recognizes diversity as a way to reduce risk. No hectic overly risky and leveraged day-trading here.

The reader may see risk here in the swing trading account being massively underweight in alts at times [up to 75% in cash and on the sidelines] in what looks to be the most bullish phase of the Crypto market going forward. But of course, this swing trading account itself is further counter-balanced by what I call the longer-term position trades in major alts [fewer but larger trades], not to mention a core in BTC itself. A snippet here from an earlier article gives ‘The Fool-Proof System of Trading’ gives the context and rationale for trading the volatility of alts also known as the swing trade:

https://davethewave.substack.com/p/the-foolproof-system-of-trading

The defining feature of the Crypto market has to be volatility. We first see massive swings to the upside followed by massive swings to the downside. The shorter term swing trade [as opposed to the longer term position trade] seeks to make the most of this volatility. The idea here, at this higher and riskier layer, is to identify certain alt coins that are more volatile, buy them at an opportune moment, and then sell them on a spike. The trade here is not primarily concerned about accumulating the coin [which has been done with your position trades], or even in multiplying the number of coins in the trade. Rather, it is a pure play on volatility - the particular tactic here involves multiplying USD and as a hedge against all your long Crypto positions in both BTC and major alts. Ideally, your swing trading account would counter-balance your long Crypto account and, potentially, even match the appreciation of that long Crypto account. As mentioned in a previous article [The nature of TA - Objectivity], the longer the time frame of a trade, the more probability it has of success. The swing trade concerning us here is not as long as the cyclical position trade [almost a hold], nor as short as day trading. It’s in a middle zone that could involve anything between a few weeks and a few months, and buying and selling depends on when the mass of market participants decide to ‘dump’ or ‘pump’ it. In the swing trade one is very much wearing the contrarian hat, and of course the dollar bull hat [for the time being], for the hedging policy consists in realizing profits in it. A solid portion of these profits can also be taken off the table, so to speak, and put to work in something totally unrelated to Crypto, such as a real asset. If the unthinkable happened in the Crypto sphere, you’d not be utterly shipwrecked as you’re hedged against some such unknowable event.

This larger counter-balancing ‘weight’ of longer-term Crypto positions, in more major alts, allows the trader, ever the pragmatist and opportunist, a freer hand in becoming relatively underweight [over-sold] in the separate swing trading account that remains distinct. And so it is that where we can speak of the weight of trades within the swing account, we can also speak of the weight of swing trades in general in comparison with one’s wider positions in Crypto.

I’ve hoped to here illustrate the way in which one can weight their trades effectively. This weighting looks to both manage the risks of those trades on the one side whilst allowing a continuity to trading irrespective as to whether that trading activity was successful or not. The aim here is to keep a steady course, neither getting overly cautious nor overly confident, but keeping it business as usual. And like those in training, you’d want to be experiencing that amount of managed stress, of exposure, with which optimal development comes. And that optimal trading tends to come with navigating a middle course between playing it too safe on the one hand, or not being adventurous enough on the other.

Until next time,

Stay [relatively] safe out there,

Dave the Wave.