As a discretionary crypto trader, you are likely to have a relatively small number of opportunistic trades (positions/bets) in your portfolio at any one time. These individual trades are drawn from a larger pool of potential trading ideas. Each time you enter a new trade for a different token, you should create a new forecast and size your positions according to your portfolio and risk of each token.
There are substantial advantages to using stop losses with discretionary forecasts (rather than using systematic trading rules). You should make predictions about the behavior of your trading and ultimately measure expected risk precisely.
Investment positions for a given forecast should take into account risk tolerance and portfolio size. You should automate your position and risk management (even on a spreadsheet) once you have made your trading decisions. This will give you more time and energy to get the forecast right.
It is not necessary to generate a detailed price analysis, such as “Ethereum is cheap at $1,600”. However, your trade conviction should be supported by a market narrative that isn’t priced in (e.g. “the Shanghai hard fork is coming”). You can then translate your conviction into a forecast signal (see reference table below).
| Forecast | Signal |
|---|---|
| 20 | Very Strong Buy |
| 15 | Strong Buy |
| 10 | Buy |
| 5 | Weak Buy |
| 0 | Neutral |
| -5 | Weak Sell |
| -10 | Sell |
| -15 | Strong Sell |
| -20 | Very Strong Sell |
You must indicate how strongly you feel about the forecast along with the direction (i.e. up = positive; down = negative). Your forecast must also be scaled appropriately with the recommended limits of \(−20\) and \(+20\) and an expected absolute value around \(10\).Keep in mind that if you cannot short a token, then you will need to limit yourself to positive forecast values.
I strongly recommend that you do not change your forecast once a trade is open. Otherwise, you might be tempted to (1) take profits too early or (2) potentially double up on losses. You can sometimes add new bets on top of an existing position but you should use a systematic trailing stop loss rule to close all your positions - no other exit rules should be permitted. This means the average holding period will depend mainly on how tight, or loose, your stop losses are set. There is no point making a forecast of Ethereum, for example, for the next three months if you are likely to be closed out by next week. You should then ensure that your trading style, and the time horizon for predicted price movements, is in-line with your stop levels. I share my mid-term weekly forecasts on the Ethereum Ecosystem below.
Discretionary crypto traders do not use systematic trading rules but instead make discretionary forecasts on either gut feeling or complex analysis, which cannot be back-tested1 and/or fully systematized. As these traders usually have a small, relatively undiversified, set of tokens they need to avoid overconfidence about their performance expectations2. I advocate that discretionary crypto traders rely on a systematic stop loss to exit trades regardless of their entry decision. Sticking to this rule will be difficult, but it will mean that your risk is controlled and your returns will have the favorable positive skew of an early loss taking3 trend follower.
To conclude, a good discretionary crypto trader should be thoughtful, humble, and underestimate their intelligence, skill and luck. To make money trading you need to position yourself intelligently in order to be lucky. Even if you do everything right, your trade could end up unprofitable if the situation turns against you. Stay humble, understand your bets and appreciate that a trade may go badly. You cannot entirely eliminate risk from trading but you can quantify it and prepare for potential downside. The most successful traders will be diligent when creating their process to control risk properly. Focus on designing a risk management framework that you are comfortable with and do not change it! Make a commitment and do not be tempted to do anything too clever4 outside of your explicit framework. You can trade in a relatively safe and controlled way by using discretionary forecasts combined with a strict stop loss policy. So it only remains for me to say: Godspeed!!
Blockstream: Block Explorers
Cryptofees: Fees
Dune: DeFi
Glassnode: Addresses, KPIs, Network Stats, Exchanges
l2fees: L2 Fees
l2beat: L2 TVL
MoneyPrinter: Inflation Rates
NonFungible: Metaverse & NFTs
OpenOrgs: Project Treasuries
Staking Rewards: Staking
Token Terminal: Revenues, P/S, P/E, Volume
Ultra Sound Money: Ethereum Fees Burned
Obviously, you cannot simulate a discretionary rule, but you can use a random entry rule. Even with a random entry you can still capitalize on trends by using the stop loss exit rule.↩︎↩︎
There is a significant amount of academic research showing examples of overconfidence in discretionary finance, for example amongst macroeconomic forecasters and equity analysts.↩︎
Prospect theory explains why investors get it wrong when confronted with certain trading decisions, such as whether to sell out of a position which is now showing a loss. Prospect theory says we take more risks in a losing position to get even, but we want less risk when winning, preferring a quick and certain gain to a chance of losing our profits. Unfortunately taking small profits and letting losses run is almost always a bad idea.↩︎
This is due to the biggest cognitive bias of all: overconfidence. We think being clever and knowing more implies we will make better decisions - but we usually do not, thanks to cognitive biases.↩︎