Trading Smarter Part 1
“There is more than one way to skin a cat”
This is true, there are lots of different ways to complete specific tasks and its impossible to say one way it better than the other, or one way is wrong and the other is right.
Because if you end up with the same result or the desired outcome you wanted to achieve then who is anyone to argue that its wrong?
I’m a mechanical engineer turn financial market trader, my skillset in my previous profession as an engineer was to have a thorough understanding of how things work and what really makes them tick.
Some times reading a manual isnt enough, some times you have to pull something apart, understand all the inner workings and sub systems to get a better understanding of the overall model.
My job would then be to figure out how I can improve, repair or make those systems more efficient to be more productive, increase power output or simply be more cost effective using less materials or simplifying the sub systems to have the same result with less moving parts.
Some times I would have to add moving parts in order to get the desired result some times it would be a change of sub systems that work better, more efficiently with each other to get the desired outcome.
When I started trading financial markets, I found it fascinating and used my skillset to really pull apart specific asset classes to get a thorough understanding of how they work at the core, what makes them tick and how I can devise a plan to extract as much money from the markets as possible.
I mean we are all here for the same reason right? to make money… but what if I could figure out a way to do it more efficiently, I’m sure there is more to it, there must be a way to do this more efficiently and extract as much money from the market with as little human interaction as possible.
Lets think about that for example, the time you spend in front of the screens, charting, placing orders, setting stop losses and take profits, monitoring and closing trades etc is all time, effort, energy, the reward is the money you make from your trade.
In traditional workforce we trade time for money, you work 40 hours for the week and get paid $1000. Want to make more money? either work more hours or ask for a pay rise!
But there is only so many hours in a day you can work and some businesses dont have the margin to offer a pay rise, so what do you do? look for another job that pays better? upskill for a promotion? you have options but there is no certainty with out putting in more time, effort and energy to get your desired result. You cant magically figure out how to do your job more efficiently that increases your pay.
One other thing to consider is our ability as traders and our emotional downfalls to our decision making.
Anyone who has been in this game long enough now, will understand that the majority of the time you lose money, it is not because the market didnt do what you thought it would, in fact a lot of the time YOU got in your way and freaked your self out.
Panic selling the dips, fomoing into the tops, or sitting on the sidelines angry you talked your self out of what would have been a great trade.
This is the opportunity cost of human interaction, some times we are just flawed operators and in most cases, over trading will end with poor results.
Now lets go back to trading time for money, at first when you begin trading, it is much the same as a traditional job, you spend time in front of the screens actively trading and monitoring to get paid. You are still trading time for money, although trading has the ability to scale your income from compounding.
Once you develop a winning strategy and become a successful trader, there is no limitations on what you can earn, and the cool thing is, it doesnt really come as a result of working more hours and putting in more effort and wasting more energy, your rewards will simply be compounded the longer your in the game with your winning strategy.
So with the analogy of trading time for money, I wanted to dive into the markets sub systems and figure out a way to be more efficient so that I dont fall back into the old patterns of traditional business of trading time for money.
Think of it like a ratio, where time equals 1 part and reward equals the other, eg 1:2
But if I could trade 1 part of time for 4 parts results (1:4) then…well, that would be more efficient and I can scale that a lot easier.
“work smarter, not harder”
I started to study a lot of trading books based around trading systems, economics, psychology and market cycles from other successful traders.
I also spent some time trading global markets and got my self a mentor from the UK who specializes in trading Forex, commodities and indices to give me a better understanding of other markets and not just Crypto.
Over the years I learnt a lot but the real penny drop moment was understanding correlation and how money flows from asset to asset or market to market, long term trends, macro cycles, and arbitrage.
I then used this new found knowledge to apply it to the Crypto market by finding out how it all works with many sleepless nights running simulations on all different ways to “skin the cat” so to speak.
I have since written a series of articles that go into a bit of depth with my findings, and I do my best to explain HOW it works and WHY it works and you can find them here
Most people who have been trading Crypto for the last 4–5 years would already know all this stuff, but over the last few years there has been a lot of new people step into the trading world and more specifically Crypto.
And with so many new trading pair options against Fiat currencies like USD and AUD its made this new wave of retail traders, bypass the knowledge necessary to understand how the Crypto market really works to take full advantage of what’s available.
Quite simply “It sounds to difficult, so ima just do it dis way” and thats fine, as long as your winning, happy and paying your bills then we are all high fiving your ability to extract money from the markets as thats our goal here.
But if you do have an open mind, like to learn and would like to know how to extract a lot MORE money from the market, or make money more efficiently with your time then you are going to have to take the time to educate yourself and change your strategy.
Here is an argument I see all to often “my ALTCOIN went up 700% against USD, but it only went up 300% against BTC, there for its better to trade against USD”….. Facepalm.
I have gone to the trouble of building a simulation for you and if you take the time to understand it, you might retract your argument above.
In this simulation we are going to start with $100 AUD, we are then going to purchase some USDT and then some VET tokens, we will then sell out VET back to USDT and then finally convert back to AUD to get an idea of the end result, this will be done based on the closing candle of the dates between the 16th of March 2020 and the 4th of April 2021.
Step 1 – 16/03/2020 : $100 AUD to USD @ .61116 USD= $61.11 USD
Step 2–16/03/2020: $61.11 USD to VET @ 0.002249 USD= 27,172 VET
Step 3–4/04/2021: 27,172 VET to USD @ .094573 USD = $2520.33 USD
Step 4–4/04/2021: $2,520.33 USD to AUD @ .76197USD = $3,308.20 AUD
Total profit $3,208.20 (3208.20%)
In this simulation we are going to start with $100 AUD, we are then going to purchase some USDT, we will then use that USDT to purchase BTC and then some VET tokens, we will then sell out VET back to BTC, convert the BTC back to USDT and then finally convert back to AUD to get an idea of the end result, this will be done based on the closing candle of the dates between the 16th of March 2020 and the 4th of April 2021.
16/03/2020 Step 1 : $100 AUD to USD @ .6116 USD= $61.11 USD
16/03/2020 Step 2: $61.11 USD to BTC @ $5057.06 USD= 0.01208409 BTC
16/03/2021 Step 3: 0.01208409 BTC to VET @ .00000045 BTC= 26,853 VET
4/04/2021 Step 4: 26,853 VET to BTC @ 0.00000158 BTC = 0.04242774 BTC
4/04/2021 Step 5: 0.04242774 BTC to USD @ $58498.93 USD = $2,481.97 USD
4/04/2021 Step 6: $2,481.97 USD to AUD @ .76197USD = $3257.86 AUD
Total profit $3,157.86 (3157.86%)
Sim 1 trading against USD :$3,208.2 AUD or 3208.2% profit
Sim 2 trading against BTC : $3,157.86 AUD or 3157.86% profit
So after 11 months there was a $50 or 1.5% difference from trading VET against USD instead of BTC.
What you will find if you run the same simulation on various coins at various time frames, the difference will always be very small and in most cases the exact same.
Some times it will be a small % better for BTC and some times a small % better for USD as this small margin is the arbitrage difference between multiple assets during the time or purchase or sale.
At the end of the day, no matter which way you purchased the asset weather its USD or BTC, if it was done at the exact same time the results would been the exact same or with in a very small marginal % difference .
So if you understood all that, your probably now saying, so why does it matter which way you do it, if the results are the same?
Well let me show you another round of simulations, but in a more traditionally way of how we trade.
By holding a trading account in a base asset or currency and using only a % of your account on each trade.
*using the same charts and prices as above
In this simulation we are going to start with $10,000 AUD, we are then going to purchase some USDT for our trading account.
Now I'm going to purchase some VET but with only 10% of our trading account, we will then sell our VET back to USDT and then finally convert our entire trading account back to AUD to get an idea of the end result, this will be done based on the closing candle of the dates between the 16th of March 2020 and the 4th of April 2021.
Step 1–16/03/2020 : $10,000 AUD to USD @ .61116 USD= $6111.60 USD
Step 2–16/03/2020: $611.16 USD to VET @ 0.002249 USD= 271,747 VET
Step 3–4/04/2021: 271,747 VET to USD @ .092755 USD = $25,205.93 USD
Our total account balance is now $34,594.77 USD
Step 4–4/04/2021: $34,594.77 USD to AUD @ .76197USD = $45,409.49 AUD
Total profit $35,409.49 (354.09%)
In this simulation we are going to start with $10,000 AUD, we are then going to purchase some USDT and then convert it to BTC for our trading account.
Now I’m going to purchase some VET but with only 10% of my trading account, we will then sell our VET back to BTC and then finally convert our entire trading account back USDT and then to AUD to get an idea of the end result.
This will be done based on the closing candle of the dates between the 16th of March 2020 and the 4th of April 2021.
Step 1–16/03/2020 : $10,000 AUD to USD @ .61116 USD= $6111.60 USD
Step 2–16/03/2020: $611.16 USD to BTC @ $5,057.06 USD= 1.20852827 BTC
Step 3–16/03/2021: 0.12085282 BTC to VET @ 0.00000045 BTC = 268,561 VET
Step 4–4/04/2021: 268,561 VET to BTC @ 0.00000158 BTC = 0.42432638 BTC
Our total account balance is now 1.51200183 BTC
Step 5 4/04/2021: 1.51200183 BTC to USD @ $58,498.93 USD = $88,450.48 USD
Step 6 4/04.2021: $88,450.48 USD to AUD @ .76184 USD = $116,090.45 AUD
Total profit $106,090.45 (1060.9%)
Sim 1 trading a USD account : $35,409 AUD or 354.09% profit
Sim 2 trading a BTC account : $106,090.45 AUD or 1060.9% profit
So after 11 months there was a 250% difference from trading with a BTC account instead of USD account.
The reason for this, during that 11 month period the asset class that your trading account was in (BTC) was gaining value against the USD the whole time, not only that, but USD was also losing value against the AUD making your trading account weaker and weaker.
If you think this is a once of cherry pick, you will be mistaken, and I urge you to go pick any coin out of the 8000 nuggets out there, and you will find the exact same results.
You can argue that “yeah but thats only because BTC went up”……..
YEAH exactly and guess what would have happened if BTC didnt go up during that time…well then your VET trade against USDT would also not have gone up.
In both simulations we only did the 1 trade, so looking at this from a “trading time for money” perspective or in the form of a ratio where 1 trade equals 1 part and $1000 equals the other part.
Then in the first simulation we ended up with 1 : 35
where as the second simulation we ended up around 1: 106
Sim 1 would need to do 3 times the amount of trades (effort, time or energy) to replicate the results of Sim 2, eg 3:105
How ever as mentioned before, trading more doesnt necessarily mean more profit, in fact some times over trading to beat a benchmark can send you backwards.
If Sim 2 also did 3 times the trades with the same perfect success, the results would be 3:318, in other words Sim 1 will never catch sim 2 if they both trade the same amount with the same success rate.
Finding the efficient way of extracting results from the market means you can spend less time in front of the screens “working” still achieving the results needed to live the lifestyle you desire.
As you might finally be able to start seeing is the results from Sim 2 is a much more efficient way to get the desired results for less amount of effort
“work smarter not harder”
Again this doesnt mean Sim 1 is incorrect, as long as the Time to Reward ratio is positive then the goal has been achieved.
Think of it like running a school marathon, If you cross the finish line you still get a ribbon and can say your a marathon runner, but there will be someone who crosses the line before you and gets a gold medal.
For those that read all the way to the end, congratulations you have a desire to learn and as long as you can put into practice what you learn or develop your own unique way of “skinning that cat”, I'm sure you will be just fine.