#15 Deep Dive - The Art of Adaptation
Let's explore the new strategy to win markets
Welcome fellow investooors! It’s crypto time so let’s dive right in. To access more content find us here on Twitter. Enjoy!
In today's newsletter, I will share my thoughts on a market strategy that has been on my mind for a while, and that I would like to share with you. So today, briefly and to the point, but I hope you'll gain a lot of insights from today's text.
Foreword
I have often mentioned in this newsletter and podcast how significant changes have occurred in the crypto market during the current cycle, causing many of you to suddenly lose the advantage you had gained in the previous cycle, whether in NFT market exploration or fundamental investing. The foundation of effectively navigating markets is the ability to adapt to what the market offers us. However, it is easier said than done, isn't it? That's why the strategy I want to talk to you about today aims to eliminate potential barriers that limit our ability to adapt to the market, thereby limiting our profits.
Common Problems
Let's start with the fact that each of us should have our own market strategy. Otherwise, what we are doing is typical gambling and has nothing to do with investing or trading. No plan, no trading. Strategy is the basis not only for earning more profits but also for preserving them over time, which many find quite challenging. However, that's not all, because what often kills our profits is the inability to adapt to new rules or meta. In other words, we are playing our game, and the market is playing its own. So how do we win?
Problem #1
We open a position, and it starts going in the opposite direction than we expected. Day by day, stress builds up, we start losing faith, but we still hold the position. Why? Because many of us struggle with the mentality of "I'll sell when I break even." In other words, selling at a loss involves admitting a mistake and injuring our inflated ego, which is not an easy thing to do. Holding a losing position has nothing to do with courage; quite the opposite. Admitting a mistake and quickly closing it is a sign of courage.
Problem #2
The position grows week by week, but we still don't realize the profits, waiting for we don't know what. If we don't have a defined exit plan, we will shift our sell levels based on market emotions, and it will end with us selling in panic when the price starts to collapse.
Problem #3
When we hold a position for a long time, we get used to it and wait for it to finally move up. But if it hasn't moved yet, despite a good market, when will it? What will reverse the course of events? Isn't it wishful thinking creeping into our minds? The longer we hold a position, the harder it will be to sell it, especially when it underperforms the broader market, and we wait for its rebound. Over time, we start looking for explanations for its temporary weakness, which seems to last forever, and instead of seeing invalidation points, we see glimmers of hope. This is how we become bagholders.
In summary, the most common problems are related to the lack of habit of cutting losing positions, the blockage of realizing profits, and getting used to holding a position and explaining its weak performance. Now it's time to see how the strategy I mentioned can solve all these problems, or at least limit their impact on our decisions.
Strategic Solutions
Strategic Solutions In response to the problems mentioned above, we need to change our approach to our portfolio and introduce clear time divisions that will force us to take action at specific intervals. Moreover, they will force us to cool down and reevaluate our investment thesis because maybe the only thing keeping us in a given project is attachment caused by current losses?
Let's start with creating our portfolio not for the entire bull run or a specific trend but only for the next month. In other words, every 30 days, we create our portfolio anew, trying to predict which assets will perform best over the next 30 days. This way, we introduce a 30-day cycle into our strategy, after which there is always a) separation of emotions from positions and b) reevaluation of theses.
Does this mean we don't hold long-term positions?
Quite the opposite. If we hold, for example, 50% in ETH and BTC, nothing prevents us from maintaining the same percentage in the following month or even keeping the identical division of the entire portfolio if we consider it right. But this requires reevaluation.
Does this mean I have to sell even my BTC and ETH?
Not necessarily. If you treat BTC and ETH as the foundation of your portfolio, you can leave these positions alone and only consider their percentage share, which might be worth increasing or decreasing depending on the month.
Do I have to sell everything outside of BTC and ETH?
If something is not your long-term position, and currently only BTC and ETH can be considered such, yes, you sell everything to stablecoins and analyze the percentage distribution anew. Maybe you won't make any changes and rebuild the identical portfolio, or maybe you'll have an enlightenment and jump to a new level during the reevaluation of your portfolio.
What's the point of reevaluation if we don't change anything?
Firstly, breaking the sales block for both profitable and losing positions. As long as we hold a position, we are attached to it. The moment we move to stablecoins, our vision of portfolio allocation can change significantly. Secondly, reevaluating current market moods, trends, narratives, and looking at the percentage distribution of our portfolio with a cool head. Math and percentages don't lie, but emotions do, and worse, they can significantly distort reality.
Does this mean I can't make any changes and have to wait until the end of the month?
Definitely not. This strategy aims to force you to reevaluate your theses and get rid of positions that you hold only because of their loss, gain, or mental attachment. If you see that a position is performing poorly and the 30-day thesis no longer applies, sell the position to stablecoins and think about the next move. If a position is performing well, sell the profit earlier if you want, because you will sell this position at the end of the month anyway, and a correction may occur by then.
Example Let's assume your portfolio consists of the following positions (percentages at the end of the month are in parentheses; I provide example tickers you are probably familiar with, don't take this portfolio structure as a suggestion): 30% BTC (27%) 30% ETH (33%) 15% SOL (19%) 10% MKR (8%) 10% AR (9%) 5% PEPE (4%)
In this case, sell everything except BTC and ETH, because on one hand, it's worth securing profits, and on the other, reconsidering the performance of individual positions and looking for another solution for the upcoming month. Maybe some narratives are coming to an end, maybe new ones are just beginning. So by selling everything except BTC and ETH, you can make changes so that both BTC and ETH account for 30%, not (27% and 33%). This way, you have freed up 40% of capital and now you consider where to allocate it.
Don't forget to keep a trading journal where you record your thesis when building positions and after closing them and at the end of the month (because these don't have to be the same dates, as I mentioned above).
Final Thoughts
The market is constantly evolving, but unfortunately, we don't always keep up with adapting to new changes because there are too many factors holding us back. So try to apply such a strategy – even if not in practice, conduct a theoretical experiment and outline a potential portfolio for the next 30 days, and after a month, compare the profit and loss balance with your real portfolio. Such a task won't hurt anyone and can help you cut unnecessary losses and free up capital.
Good luck!
That’s all for today, thank you all for reading this week’s Deep Dive and see you in two weeks time! To access more content find us here on Twitter. See you there!
~ ModernEremite & Crypto o’Clock Team
This newsletter is provided for educational purposes only and does not constitute investment advice. It is not intended as a solicitation to buy or sell any assets, and readers are strongly advised to conduct their own research and seek independent financial advice before making any investment decisions. The authors and publishers disclaim any liability for any direct or consequential loss arising from any use of the information contained herein.