Some Lessons From Trading

I’m a crap, inexperienced trader. But here are some lessons I learned the last few weeks trying my hand at trading perpetuals on dydx. At the end of the article I’ll discuss my current positions:

A few weeks ago I put on a massive short position on Cardano (in hindsight too large of a position) at an average open of 53.5c. It’s not like I had some particular insider knowledge on Cardano, I was just bearish the macro environment, and shorting an $18b alt layer 1 that nobody uses seemed like a good way to play a bear market. I put on a pretty big position that had my account leverage around 1. After a few days or so the trade went in my favor and I was up 15-20% or so. Unfortunately I didn’t cash anything out, and subsequently watched Cardano pump up nearly 50%, putting me down 30% a couple days later. My account leverage suddenly shot up to nearly 2, freaking me out, and I sold some eth to add more capital to my trading account not wanting any risk of liquidation. It was at this point that I put in stop losses as well (had never done this before – dumb I know).

Cardano proceeded to drastically outperform the rest of the crypto markets. While everything bled, Cardano somehow managed to carry on higher. Other than the launch of the Iagon eth/Cardano bridge on 5/30, there was no news to justify this price increase. The Vasil hard fork is scheduled for 6/29, and Grayscale may have potentially bought more Cardano for one of its funds, but TVL and active addresses on Cardano have not increased.

3 days ago with Cardano still surging while every other token was bleeding red, and my position in Cardano feeling way too large, I had had enough, and I panic sold half of my Cardano at a serious loss (starting at 64c), putting a little of that money into shorting Solana. (as I write this Cardano is at 55.7c so that was an expensive mistake, though would’ve been fine had I immediately transferred it all into Solana shorts).

Since the CPI inflation numbers were released Friday, markets have tanked again. As I write this, Cardano is down 2% over the last 24 hours while Solana is down 8%, ethereum down 7%, and practically every alt coin is down 7%+.

Here are my lessons:

Diversify shorts if you’re making a macro play and don’t have a particular edge on one token

Being right and still losing money sucks. I was right that macro sentiment would drag markets down, and had I shorted any other token I would’ve made money, but Cardano weirdly outperformed.

Now I have diversified my shorts from Cardano (ADA) to also SOL, DOT, and ATOM. I may throw in some other tokens as well.

Concentration is fine when you have full conviction on that one token, like I did during the Luna/UST crash. But me shorting Cardano was admittedly not based on any strong enough analysis other than it having less usage and TVL than competitors like Solana despite having twice the market cap, and me thinking a bear market would hit alt layer 1s particularly hard. Even if I think Cardano is still overvalued, it doesn’t mean anything if enough others don’t.

Learn to position sizes accordingly

This is probably one of the hardest parts of trading, and I don’t think there are any easy absolute answers.

I am now more convinced than ever however that leverage should never be touched. If you do use leverage, it should only ever be with strict stop losses (and ideally also profit taking orders already in place) so that your max loss is already predefined. The problem with leverage is that even if you’re right directionally, the volatility can still liquidate you (being liquidated means you lose everything by the way, ie. your account balance goes to 0. Liquidation should never even be a possibility). Leverage will also increase your probability of panic selling when the trade goes against you since leverage by definition means your position size is too large.

Your position is too large when you’re losing sleep over it, unable to focus on anything other than price charts, and tempted to panic sell when your trade goes against you.

Your position is too small when you’re desperately trying to increase it when the trade starts going in your favor.

If you’re not sure on when to enter, dollar-cost averaging is not a bad idea.

Take profits

Its especially important to take profits on large positions that drastically go in your favor. Markets rarely go up or down in a straight line, so during volatile times there’s a decent chance you’ll be able to re-enter again when opportunity strikes. And if not, then there’s no shame in locking in some profits, especially on severe market moves that have a high likelihood of mean-reverting.

I’m no psychologist, but my experience is that human bias is to ride profits too long – getting cocky and thinking the trade will continue to go even more in your favor – and cutting losses too easily / panic selling.

Be cognizant of catalysts and market moving events

Now that we’re in a bear market where macro is dictating everything, you should always be cognizant of market moving events like CPI inflation releases and FOMC meetings when trading, and adjust your convictions and trades accordingly.

Stop thinking about the past, Focus on the next trade

Stop thinking about your “peak net worth” and the last trade, focus on the next trade.

One of the top basketball coaches who’s coached players like Michael Jordan said that one thing he found separates the best basketball players from the rest is that they’re focused on the next shot, not fixating on the past shots.

Being a successful trader is all about being disciplined and sticking to a system or framework. That doesn’t mean being rigid in one’s convictions, it means adjusting to data and new information as its presented. Putting too much attention on prior trades and peak net worth is at best a meaningless distraction that will not help you in moving forward.

Step away from computer

Step away from your computer and the trading charts every now and then. Staring at your trading platform all day can lead you to overtrade and be overly short-term focused, wasting time nibbling with little microtrades that are often at best a distraction, and even worse lead you to emotional trading. I’ve probably lost more money on microtrading than I’ve made, and that’s not even factoring in opportunity cost.

Instead of micro-optimizing, use that time instead to do something more productive, or even step away from work to improve your quality of life and reset your brain. Putting in out of the market limit orders is a good way to still be able to capitalize by large market swings without constantly being plugged in and risking myopic micro-optimizing

My current trading positions

Currently I’m short SOL, ADA, DOT, and ATOM. I’ve been paring down my ADA (Cardano) short because the buying pressure on that one are beyond my comprehension, and reallocating my shorts into the other tokens. I may put shorts on other altcoins as well.

To be clear I have nothing against those tokens, I’m just very bearish on the macro environment, and believe this will crush most altcoins. I don’t think that markets have fully priced in secular inflation and Fed tightening. Recall that the markets were propped up largely by Fed quantitative easing, and quantitative tightening will do the exact opposite.

The FOMC meeting next week will be the next important important event for markets, with consensus expecting a 50 basis point hike. With the latest CPI inflation numbers surprising to the upside, there’s no question that the Fed will continue tightening and raising interest rates, selling off risk assets.

Instead of lamenting market conditions, I’ve chosen to seize the opportunity and play it short. But of course this is not financial advice. Stay safe out there.