To Set a Stop or Let it Run?

Dear Readers,

All traders face a quandary - how far should they let their trades run? They are incentivized to sell at some point in order to manage risk and take profit, yet if they do take those profits, they more often than not see the trade reverse and go on to new heights… especially in a renewed bullish market [as I believe we’re in].

This article looks to further explore these conflicting incentives [to take profits and to also stay long/ invested] with the use of a strategic approach which I’ll term the ‘traffic light system’. The idea being that we could strategically split our trades into various types, where those the conflicting incentives of taking profits while also staying long are resolved to some extent.

Green Light

The bottom primary ‘layer’ of your trades could be consider green. The ‘green’ trade is the longer-term trade, and could also be thought of as an ‘investment’ as relative to shorter-term trades proper. I ‘interrogate’ that word for though it becomes a near investment as relative to the timeline of the trader, it still remains a trade. This green trade could also be considered a position trade, or a cyclical trade - it’s purpose being to absorb the kind of volatility that often sees you stopped out in an extremely volatile market. What I mean here is that the position trade, in order to get established for the longer-term, is allowed to go underwater for a bit if need be.

Remember, this is your first layer of trades, ones that may be bought from an initial heavy cash position. They could afford to go underwater for a while, with the primary rationale being to gain some exposure to the more volatile alts, and in particular, to the more major ones. Here the aim is not so much the 2x that we often become focused on, but that 10x when we zoom out on the chart and consider the entirety of first a recovery and then a bull market.

Also, as mentioned, it helps here with these initial position trades to establish a few trades in the more major and established coins due to their being less risky in a relative sense to other more minor alts from the charting perspective, where you have some previous history to go on.

Orange Light

Whereas the green trade would be classified as a position trade, the ‘orange’ trade would be a swing trade proper. Though a swing trade is still a relatively long term trade as compared to the day trade, it is also relatively short term as compared to the green position trade. The rationale of the swing trade is not a sit and hold for the cycle [a near investment], but a trade on the large swings in volatility that are bound to occur over the course of that cycle. As a trade, it also has the logic of accumulating USD [all trades on volatility should naturally be in alt/ USD as this is the most volatile].

Here the reader might object and ask why on earth you’d sell into USD in an ongoing bull market? And the response here is that not only is one looking to take actual profits in the interim on the market’s volatility, but one’s also looking to hedge all existing longer-term/ green trades that are long Crypto [both alt and BTC positions].

Here we have the identification of a trade on the risk management side of the ledger, quite the opposite of leveraged day-trading [the strawman]. Yes, any trade is risky, and yet the rationale of this trade is one of risk-off, in order to build cash reserves on Crypto volatility. One riskier way of attempting it is leveraged day-trading [where often exposure to BTC is lacking], but the odds become more favorable once you introduce a decent time-line into your technical analysis while avoiding leverage.

As color overlaps and blurs together on the spectrum, so one could be flexible about the swing trades on the table - the length of time involved may be shorter, and others longer, which would no doubt depend not only on technical set-ups on the chart, but also on the actual price performance in the market that may serve to defy all predictions. The swing trade is always an opportunist trade, where one may become heavily exposed to the alt market at more promising moments.

Of course, if one becomes more heavily exposed, with the USD cash fund increasingly put to work, then the use of stop losses now becomes crucial. For the rationale of this USD fund [hopefully increasing while continuing to counter-balance your alt exposure in green trades] is a hedge and counter-balance you your longs. Where the initial green trades have the ‘luxury’ of going underwater [from a heavy cash position], the orange swing trades do not. The USD value of these trades are to be protected at all costs.

Accordingly, a relatively tight stop-loss is to be set. Personally, I use a realistic 10% SL on entry, where I consider 5% hardly appropriate for the radical volatility, and then use a series of trailing stops that is set on a technical basis below the level of daily volatility [if the trade gets some traction]. Sometimes it is stopped out, at other times it survives to produce a profit. At even other times, it might be converted to a long term/ green cyclical hold.

Following this approach, you may even find that profits taken in swing trades serve to pay for some further longer-term relatively heavy positions [greens], which, if the cycle does indeed eventuate, would pay out handsomely. All while continuing to maintain a counter-balancing USD fund in your trading account.

Red Light

Red is the color of warning, and is appropriate for the day trade… which has perhaps the highest risk/ reward ratio - very risky but also potentially very rewarding. And this can be the problem with this highest layer of trades, that the reward is more often than not only potential… with the potential equally being for loss. Personally, I do not day trade, but I am not a purist about it, and even indulge a little myself from time to time. But what I would suggest to those wanting to day trade [and naturally we do] is to first have the lower layers and less risky trades in place [green and orange] before speculating at the highest and riskiest level in the red day trade. Taking this more multi-faceting approach would also put less of your capital at risk while still being invested/ long in the market. This follows on from a fundamental principle I apply to technical analysis:

If time were to be placed on a spectrum, with the shortest of periods at one end and the longest of periods at the other, randomness and possibility would belong to the shortest periods, while pattern and probability would belong to the longest periods. There would be varying degrees of probability/ randomness depending on what point of the spectrum you were dealing with - at the one end, minutes would be near completely random, at the other end, years would have a much higher degree of probability.

To sum up, the reader may see at a glance that I’ve written more on the orange/ swing trade than either the long-term green or the short-term red. And this is an appropriate weighting in my opinion as the green trade, once established, can almost be ignored for a year or so, as it quietly works away towards that eventual goal. However, the orange/ swing trade though warrants more attention, where on the more medium time-frame it is more amenable to technical analysis.

The challenge for most traders is, in my opinion, one of expanding their time horizon for trades from the short term red/ day trade to the longer term trades, whether orange or green, where at least as much attention would be given to the orange as to the red…. with all trades serving to compliment and counter-balance the others.

Until next time,

Stay, relatively, safe out there,

Dave the Wave.