Just Another Crypto Trading Journal
I’m excited to start my first public trading journal. I have been a break-even trader for a long time, and I recently made some major adjustments to my strategy, which have resulted in edging myself towards profitability.
I won’t go into the ins and outs of my history in the markets, but I have experienced huge swings, from massive success, to catastrophic losses. I categorise myself as a break-even trader because to-date all of my periods of gains have been wiped out by periods of losses.
I do believe that I am fundamentally capable of being a long-term profitable trader, and my recent disciplined approach has begun to yield some great results. I have learnt a lot from the swings of the past, principally to manage risk, but also a lot about my psychology as a trader. All lessons that you cannot buy.
I am starting this journal to ensure that I adhere the the rigour and discipline that is required to be successful in this game. I also think it will be fun to share the journey with those that wish to follow.
All of my trading will be publicly verifiable via my CMM page using the link below.
The key to any profitable trading strategy is good risk management. Risk management typically varies dependant upon strategy and a given edge that a trader has with their specific strategy.
For the purpose of this journal, I will be applying the following risk management rules.
Rule 1: Never risk more than 5% of account balance on a single trade.
Rule 2: Never trade more than twice per day.
Rule 3: Always take two days off per week.
These rules are perhaps a bit unorthodox because they refer more to mechanisms of controlling psychology than the allocation of capital. You will see below that I define my capital allocation rules under the category of “expected value” instead.
Why do I do this? Because my biggest weakness as a trader is caving in to cognitive bias. I make the best trading decisions when I am sharp and well-rested. Consequently, limiting my trading frequency to a sensible amount is the single most effective way that I have found of maximising returns (EV).
Expected value (EV) is calculated by taking an assumed edge of a specific strategy, and multiplying it by the volume that is predicted over a period of time. The long term expected value of a strategy will be constrained by many factors; most notably:
- The ability of a trader to maintain the same edge in the market for an extended period of time.
- The available liquidity in the market, especially as capital deployed to a given strategy increases.
- Changing market dynamics, which impact the basis upon which a strategy exhibits an edge.
In order to calculate the expected value of our strategy, we need to make some assumptions.
How frequently will we have a winning trade compared to a losing trade?
For the purpose of calculating expected value we will assume that we have a 50% win rate.
How will the size of our losing trades compare to the size of our winning trades?
We will target a reward-risk ratio of 3:1, meaning our winning trades will net 3x more than we lose on our losing trades.
How frequently will we be able to trade?
As per our risk management rules, we will only be permitted to trade twice per day, for a maximum of 5 days per week. Therefore, our expected trading volume is 10 trades per week.
How much liquidity is available to us in the markets that we intend to trade?
We anticipate there to be enough liquidity to support notional exposure of up to $5,000,000 USD. In order to obtain such large exposure we will likely segregate our trading activity across multiple exchanges.
How much longevity does our strategy have based on assumptions about projected market conditions?
We forecast the market conditions for our strategy will remain very good, if not improve substantially, for at least the next 12 months.
Taking all of the assumptions above into account, we can calculate the expected value of our strategy over the next 12 months in Excel, and plot it on a chart. I have assumed that I will take 8 weeks as holiday throughout the year, and therefore calculated EV over 220 days.
You will notice the “hockey stick” shape of the equity curve, where the growth in capital for the first ~40 days is exponential. This is a consequence of the fact that the strategy is not limited by liquidity in the market. Once liquidity is exhausted, the strategy yields linear growth at a rate of $30,000 USD per trading day.
I can’t talk too much about strategy, because the majority of my edge is grounded in intuitive analysis of markets, as well as a so-called “gut feeling” that I have developed over thousands of hours of observing how markets behave.
Where I have typically been unsuccessful in the past relates to risk management, and management of my emotions. It is impossible to realise an intuitive edge over the market if you do not manage risk and keep your emotions in check, and this has been my main downfall.
Throughout this process of blogging about my trades, I hope to improve my ability to stay on top of the psychological challenges of trading, as well as demonstrate to others that this is the single most important aspect to overcome in order to achieve profitability.
I will share analysis of the market structure and of my trading decisions frequently too, which will likely take the form of quasi-technical analysis. It will certainly be atypical to the technical analysis you’re used to seeing online, but I hope to provide some unique insights into the market that might otherwise be largely unknown.
Follow me over on Twitter @electricave0.